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Creating a Marketplace: Liquidity, Regulation, & Post-Trade

Peter Randall, SETL President

There are three things that need to come together to deliver a successful marketplace. The first is a scalable robust technology offering or matching engine technology that will allow buyers and sellers to interact to either add or subtract liquidity. Both buyers and sellers can add and subtract liquidity from the platform multiple times during a trading session. They do this by either bidding or offering merchandise in particular assets and of course across multiple assets as well. Thus a bidder may add liquidity in certain names and subtract liquidity in a different set of names all in the same session. The key concept that drives adoption and acceptance of the venue as a trading platform is its ability to attract LIQUIDITY. As broader market participants find that traditional sources of liquidity are starting to become less liquid they are drawn towards the exchange as a place to meet and negotiate transactions with other qualified market participants.

Standard Rules

A key enabler of these interactions is the application of a standard rule book which provides rules as to the operation of the market-place. These can be as trivial as establishing trading hours and publishing a market holiday calendar to more complex activities like setting `KYC standards, providing for resolution of disputes, publishing market data and setting standards around participant behaviour. The most significant rules will provide for what will happen when a trade is undertaken in error and how and, under what circumstances transactions can be cancelled. Most market-places appoint a committee of representative users to uphold these rules and provide a forum by which rules can be changed as market practice develops as well providing a forum to resolve disputes. A robust and user influenced rule book is very important in promoting trust which in turn begets LIQUIDITY.

Cost Effective Settlements

The final factor that is needed to create a successful market-place is to have a cost effective settlement system which allows the participants to achieve delivery versus payment for their transactions in as timely and efficient way as possible. This allows certainty to flourish and promotes the reputation of the market-place as having integrity and trust. The market microstructure is dictated by the technology and the rules but it often achieves the same outcomes as the OTC systems that it replaces except faster and cheaper. Certainty around settlement, a well-defined rule book and a cost-effective matching engine are all elements in users minds when they consider venues to get their business done.


Having an appropriate economic model including governance, equity participation, market data, charges and fees are also important but largely secondary to the overarching need to promote LIQUIDITY. 21st century technology, including a high performance trading engine, connectivity, a settlement platform and links to be able to update legacy infrastructure as well as make payments and offer settlement finality can deliver a very cost effective market place. Fee across this market place are often a fraction of the incumbent charges and very often can significantly reduce settlement periods from over 50 days to less than two with commensurate improvements in both risk management and the number of trades that can be undertaken. As the technology is cheap and the improvements in process are so large the fees that the platform can charge are usually sufficient to allow the owners of the platform to record a positive profit and loss experience in less than eight quarters. Of course the combination of 21st century technology coupled with low fees and positive process improvement all contribute to the nirvana of marketplace creation and help to build LIQUIDITY.

At SETL, we have develop distributed ledger technology and dedicate our focus to financial services. We have a range of solutions across the three major pillars of market infrastructure, asset management and payments. Extended settlement periods introduce complexity, risk and cost as firms have to account for unsettled trades and must devote capital to the possibility of settlement failure. SETL Markets is a framework for real time trading and settlement of financial instruments that addresses these issues by shortening the settlement period to a matter of seconds. Check out our SOLUTIONS page and our MARKETS page for more info.

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