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Tuesday, 29 September 2015 00:00

Wall Street's Year End Stock Market Targets vs You Know Who, Then There's Real Estate... Featured

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I had some prognostications in December or 2014 for the new year. These are apparently quite contrarian in relation to the sell side. Let's take a quick peek and then compare to the smartest guys in the room (you know, the sell side analytical machine) year-to-date...

This is self explanatory, keeping in mind that the S&P 500 was somewhere around 2028 and the 10 yr Treasury was roughly 2.1% on January 1st of this year. 


Notice how I also commented on real estate prices. We have definitive research which shows a definite correction coming,  but more on that later. The question du jour is why so many (as in all) of the sell side banks proffer such bad (actually, inaccurate) research?  Well...

Banks do three things, and three things only

  1. They amass capital from one group of people and/or entities and give it to another group, requiring substantial fees along the way, ie. lending and securities underwriting.

  1. They move financial assets around the globe, between and amongst individuals and entities, requiring substantial fees for said transactions, ie. securities brokerage

  1. They provide financial advice and related transactions, again for significant fees

As those who follow me over the years know, I provide advice. Much of that advice runs circles around the sell side. I'd love to take credit for being hyper-intelligent, but the secret sauce actually lies in muppet mentality and conflicts of interest.

But what about the other components of the banking model?  Well, technology is now available that may prevent guys like me from posting laughable graphics like the one above in the near to medium term future.  

Fully distributed banking models (we're talking full on disintermediation here) combined with independent (which eliminates the "muppet" factors of conflicting interests) advisory businesses can do all of the above while allowing end users to maintain control of their capital while removing the incentive of advisors to "churn" trading and transaction activities.

What would a fully distributed banking system look like and how would it prevent 12 analysts from giving highly inaccurate forecastsforecasts? 

Traditionally, over-the-counter (OTC), or off-exchange trades are brokered between two parties without being subject to a middleman in the from a centralized legacy exchange. The terms of an OTC trade, including any pricing information, are not necessarily published to third parties. In this case,  the middleman is the banking institution. 

In contrast, legacy exchanges provide some pricing transparency and mitigate most credit risk (except that emanating from the exchange itself) in the event of infrequent defaults by trading parties. When they work, these features encourage market liquidity. However, when legacy exchanges fail, either party to a trade may lose value as defaults and evaporating liquidity overwhelm any marginal safety nets.

Fully distributed financial systems brings the benefits of legacy exchanges to OTC transactions, but without the associated costs. Smart contracts enable OTC trades featuring unique characteristics, with publicly published pricing, and where all credit risk and counterparty risk is removed. Liquidity is provided by a distributed, peer-to-peer exchange, which is essentially a mesh network of participants looking to deal directly with each other. Blockchain technology allows them to do so pseudonymously, and without having to detour through a formal entity (not even Veritaseum servers have access to the assets) that can default, collapse, corrupt, or defraud.

Transparency and accountability are unprecedented. The details of every transaction are logged in the blockchain and readily available to all who are privy to the trade. Each node has its own copy. Any entity who wants this information can have it, and all transactions related to it, forever.

What Would Such A System Look Like?

Vertiaseum’s core technology utilizes four major components: the blockchain, a data source (e.g., a ticker feed), Veritaseum’s proprietary server technologies (“Facilitator”) and the  Veritaseum HTML Wallet (essentially, a very advanced web page), which communicates with the Facilitator via an Application Programmer’s Interfaces (API).


In the first phase, the Wallet validates the order terms (e.g., payor instrument, receiver instrument, principal, collateral, expiry, etc.) with the Facilitator. The Wallet broadcasts a transaction conforming to those terms. The Facilitator activates the order when it sees the transaction in the blockchain.

Read 1975 times Last modified on Wednesday, 30 September 2015 10:48

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