Forefront Communications

Pensions & Investments: Blockchain Eyed for Small-Cap Liquidity

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Forefront Communications

Forefront Communications

Some financial technology executives are suggesting that if the Securities and Exchange Commission’s tick-size pilot didn’t enhance liquidity in the small-cap equity markets, blockchain possibly could.

Proponents and developers of distributed ledger technology — the infrastructure called blockchain used in cryptocurrency trading and settlements that connects computers that verify and validate transactions — said it has the potential to make small-cap trading more efficient, transparent and cheaper than forcing wider bid-offer spreads, as the tick pilot required.

They say it could also increase liquidity by turning small-cap shares into tradeable tokens, similar to the creation of initial coin offerings for cryptocurrencies, to trade on blockchain. That, sources said, would fulfill the SEC’s original tick-pilot intent of making it easier for smaller firms to make initial public offerings, which would increase the number of small-cap stocks available to trade.

“You get more liquidity when there are more people who’ll play in the space, more people willing to make quotes, more people to do price discovery, all at the push of a button,” said Kate Lam, managing director, digital capital markets, at digital asset distribution firm Ideanomics, New York. “If returns are affected by lack of liquidity, (blockchain) solves for that. If returns are affected by cost, it solves for that. The more players there are in the market, the more efficient it becomes.”

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