1994-06-21 - e$: Geodesic Securities Markets

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From: rah@shipwright.com (Robert Hettinga)
To: cypherpunks@toad.com
Message Hash: 6a1a0e712cbd84af623f5b253acad2ca743ac7bf060b315ccb363372a64d3a7a
Message ID: <199406212203.SAA18481@zork.tiac.net>
Reply To: N/A
UTC Datetime: 1994-06-21 22:04:00 UTC
Raw Date: Tue, 21 Jun 94 15:04:00 PDT

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From: rah@shipwright.com (Robert Hettinga)
Date: Tue, 21 Jun 94 15:04:00 PDT
To: cypherpunks@toad.com
Subject: e$: Geodesic Securities Markets
Message-ID: <199406212203.SAA18481@zork.tiac.net>
MIME-Version: 1.0
Content-Type: text/plain

Flame bait alert.  Those of you who "know this already" (or know who's
posting ;-)) hit your spacebar (or down-arrow, whatever) now.

When it rains, it pours.

I've been yammering about e$ to another one of my UofC friends for a while
now.  He's ABD (all but dissertation) in Physics, repeated the process in
Finance, spent some time at First Boston and now builds asset/liability
software for insurance companies.  He'll remain nameless, 'cause if he
wants to fess up for his part in this craziness, he can do it himself.

Recall I'm screwing around with business models for e$ financial entities,
and how I talked about how the crypto-security it requires makes the funds
transfer system more granular and the network it lives in more geodesic.
Definition of geodesic network: a network where nodes (switches) become
more prevalent than lines (lines :-)) the opposite of pyramidal or
hierarchical, where the opposite holds. (From Peter Huber's "The Geodesic
Network", 1987, U.S. Government Printing Office)

So I'm swapping OJ jokes with this guy, and he says, "I've been thinking
about how this electronic money stuff makes brokerage firms disappear".
And I blurt, "like I did with banks!", and I sent him my last e$ screed,
about how to make demand deposits obsolete with digital cash ;-).  We
gibbered at each other for an hour or so, and here's how *he* made
*brokerage firms* go away...

The primary reasons for a brokerage account are 1.) safety, to protect your
securities from theft.  2. To be able to trade those securities
conveniently, by keeping them in "street name",  3.  only brokerage firms
can trade in the capital markets, because the markets are a giant
"web-of-trust", to quote someone around here.

Strong crypto accomplishes 1, and e$ protocols make 2 and 3 meaningless.

Without boring you folks too much, trades are executed by brokerage firms
for their clients in the market, where buyers and sellers are matched.  The
trades are  given to clearing houses, which are like banks, but hold
nothing but stock.  The clearing houses swap book entries around and then
notify the corporation that the stock was sold so the company know who the
new stockholder is.  The reason this can happen is because your stock is
actually held at the clearinghouse in the name of your brokerage.  You've
signed paper somewhere allowing all this to happen.  Otherwise you have to
take physical delivery of your securities, and re register them in street
name when you want to sell them, which takes time and money to do.  Your
time and your money.  Most people don't take physical delivery as a result.
They just leave it at the brokerage in street name.

If you remember the last post, you can see where I'm going with this.
Strong crypto allows the reinstitution of physical delivery.  Well, the
electronic analog of it, anyway.  Instead of keeping a security at a
broker's account in a clearinghouse, a stock "certificate" is issued by the
clearinghouse to the buyer immediately at the time of sale.  Instead of
keeping brokerages' securities on account and swapping accounting entries,
the clearinghouse acts more as an officiator, "blessing" the trade, and
notifying the corporation of the change in its ownership, etc.  Like
digital cash, No one can steal your certificate or use it if they do, and
if you're backed up, you might as well have it in Fort Knox...

Okay. Those are points 1 and 2 from above.  Point 3 is where we wave our
hands a bit.   Unless I'm beaten senseless by arcana, it seems to me that
every kind of securities market (including the electronic ones!!) from the
specialist system to open outcry can be done on line.  (In cyberspace no
one can hear your open outcry <hyuk!>).  The important question here is,
_who trades?_.  It seems pretty obvious to me that if you can prove you own
a security, you should be allowed to trade it.  Since you have taken
"physical" (metaphysical???) delivery, if *you* can't prove ownership, no
one can.

Notice this system allows for position traders, arbitrageurs, portfolio
managers, investment bankers, equity and fixed income salesmen (who buy
inventories of securities and resell them to their clients at a spread for
the information<fat chance!>), and lots of other current players in the

In addition, it blows the doors off the role of the brokerage firm as the
gatekeeper to the capital markets.

It also creates a menagerie of other financial creatures and entities...
To quote the famous Dr. Emil Lizardo, "It make-a the ganglia twitch!"

My pal says that these protocols could help in derivatives markets, where
securing ("insuring?") instruments is a problem...When I get that out of
him, in a form that I can understand, I'll write it up and kill more

Bob Hettinga

Robert Hettinga  (rah@shipwright.com) "There is no difference between someone
Shipwright Development Corporation     who eats too little and sees Heaven and
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