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The Next Generation and Future of Alternative Trading Systems

The Next Generation and Future of Alternative Trading Systems

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By    |   Thursday, 17 December 2020 05:49 PM

Every so often the investment and trading world gets transformed by technology and innovation. It’s happening again, this time thanks to a new generation of Alternative Trading Systems (ATS).

Leading the way are the fintech firms StartEngine, announcing that they have launched the very first crowdfunding secondary securities exchange, and tZero, the very first digital exchange for securities tokens. Investors of all types can now invest and trade equity and debt securities issued by small-to-medium sized businesses (SME’s) and real estate firms.

There are a number of challenges to solve as this brave new world of capital markets comes to life, from regulatory to settlement infrastructure to research to liquidity. Fortunately, the regulators have stepped up to help ensure orderly market emerge, new ATS’ work diligently to create systems with detailed research data while building buy-side momentum, and a new breed of custodians such as Prime Trust are providing the infrastructure for the industry and maintain integrity and settle transactions. With these factors coming into place the securities industry, at long last, is poised to fulfill the never-realized promises of SecondMarket and SharesPost for secondary trading of private securities at scale.

Secondary markets for private securities and real estate interests are the future of capital markets. And even though clearing brokers generally won’t hold private securities and traditional public-markets settlement infrastructure doesn’t support these transactions, Prime Trust and other technology-driven financial institutions are creating systems and infrastructure for this new world of trading. Many of these next generation ATS’ are choosing to use PrimeCore for their infrastructure thanks to the company’s proprietary accounting, compliance, payment processing, reporting, and transaction settlement systems.

Here’s how I think it will evolve:

  • Real Estate. The asset class has underlying security (of real estate), predictable returns, and defined exit strategies that investors understand and embrace. Thus, I believe that ATS’ focused on real estate will be the early movers in this space and find the earliest success.
  • Debt. Perhaps my view is jaded from starting my career as an institutional fixed income trader, but investors like debt, with its defined returns and exit horizon, and so it trades very well. Brokers and their desks are already used to hunting for “pieces” and comfortable trading in small denominations, as municipals and corporates typically have very limited availability on any given day. So, SME’s issue debt then there is an easier path to building a buy-side for ATS’.
  • Equity. Imagine if an employee of TikTok exercised their stock options, put them into custody at Prime Trust, and listed them on an ATS. It'd be a feeding frenzy for buyers — and a game-changer for that particular ATS. This will happen. Perhaps not TikTok, but some major private brands will be traded. Employees, angels, early venture investors, and others will use this for liquidity. Thanks to the ease of listing on an ATS platform, and the ease of validating and trading securities held by a qualified custodian, this will validate and accelerate the adoption of these new marketplaces.

Keys – Research & Buyers. For an ATS to create buy-side demand for securities on their exchange, besides carefully selecting the issuers they list they will need to do several other things well. Most notably is a complete set of data for every security listed, including the original Private Placement Memorandum (or other offering information), updated company financials, and a history of payments made to investors. Research will also come into play, and numerous brokers such as Houlihan as well as rating agencies such as Zack’s are already engaged in producing reports for private businesses. I think there will be innovation and disruption in that space as well.

As all this comes together, these new exchanges will disrupt and improve our capital markets in ways previously unimaginable. Access to capital for entrepreneurs, startups, small businesses, and real estate will become far more efficient, and this will lead to a democratization of investment opportunities that had previously been reserved only for the very rich.

The ATS field is going to continue to see new parties jumping in across a variety of industries — big and small. The future has yet to be written and opportunities will abound as this new industry takes shape.

Scott Purcell is the the CEO and chief trust officer of Prime Trust.

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Every so often the investment and trading world gets transformed by technology and innovation. It’s happening again, this time thanks to a new generation of Alternative Trading Systems (ATS).
next generation, future, alternative, trading, systems
Thursday, 17 December 2020 05:49 PM
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