In brief
- Wedbush joins Bank of America, Credit Suisse and others in testing blockchain
- Blockchain-based clearing and settlement promises faster and more reliable stock trading
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The giant investment firm Wedbush Securities announced on Thursday that it would begin using blockchain technology to settle certain stock trades. The news, which follows similar moves by the likes of Credit Suisse and Bank of America, is the latest vote of confidence in a process that promises to make stock markets faster and more efficient.
Currently, banks and investment firms rely on legacy software systems to record and clear the billions of stock trades they carry out every year. While the legacy process is mostly reliable, it is slow—trades can take up to two days to complete—and has led to high profile recent meltdowns, such as one this spring that forced Robinhood and other brokerages to suspend trading in meme stocks like GameStop.
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Those trading halts came after high volatility and trading volumes swamped the back-end settlement and clearing services, leaving them unable to determine if the brokerages had enough capital to backstop customers' trades. In response, Robinhood's CEO publicly called for "real-time settlement" to avert similar halts in the future.
Blockchain technology offers the opportunity to conduct such real-time settlement, and is also considered highly reliable and secure.
To conduct the blockchain-based settlements, Wedbush and others have turned to Paxos, a New York-based blockchain infrastructure firm that also handles Bitcoin and stablecoin operations for the likes of PayPal.
For now, banks and investment firms are using Paxos on a pilot basis, settling only a portion of their overall trades on the blockchain. But as the technology continues to prove itself, blockchain-based settlement is expected to grow rapidly and one day replace the legacy software systems entirely.
The advent of blockchain clearing and settlement promises fewer trading halts for consumers. And for banks and brokerages, the new process is likely to free up capital since it will shorten the time they need to hold funds in reserve while trades are cleared.
“It's crystal clear that Blockchain technology is destined to completely modernize securities settlement and custody. Paxos is way out in front in the evolution, and we are thrilled to be on board with this exciting new platform," said Wedbush CEO Gary Wedbush in a statement.