Crypto Offers a Road Map for Improved Stock Trading

The dispiriting thing about the Securities and Exchange Commission’s 400-page proposal to re-engineer financial markets, and the response from outside the agency, is that lawyers and economists are arguing over questions that have easy technical solutions. If we wouldn’t trust these people to design the electrical power system or build a spaceship to Mars, why should we listen to them on market rules?

One basic issue the SEC is trying to address is how best to match buyers and sellers. The goal is not controversial: The person willing to pay the most should buy from the person willing to sell for the least amount, and these transactions should continue until every holder of the asset values it more highly than anyone who doesn’t hold it.

The trouble is that not every potential buyer and seller watches the market continuously, ready to make instant decisions. Therefore, intermediaries arise to provide liquidity. Economists study different market systems, and argue about which one is best, using different definitions of best. Regulators make rules to force the system to be better, cheaper or to favor certain groups. All of this leads to complex systems, prone to unintended consequences and unexpected crises, with lots of money syphoned by clever people and insiders.

Now consider crypto. To some, “crypto” means tokens with monetary value such as Bitcoin, and to others it means ledgers like blockchains. But I think of it more broadly as engineers applying rationality to problems non-technical people have squabbled over without resolution forever. Instead of arguing about what money is, make better money and put it in the public domain. Instead of regulating how records are kept, build a record-keeping system that meets everyone’s desires.

In crypto, designers started from scratch, not to entrench themselves in a legally protected oligopoly but to build exchange systems preferred by voluntary users. To date these have been used only for crypto assets, which has limited the attention they receive, especially when crypto assets are in decline. But the basic ideas are better, simpler and cheaper than traditional financial markets and should eventually supplant them.