IEX Group, which rose to prominence with its bid to shake up stock trading in the United States, now aims to do the same in the more than $5-trillion-a-year gold market with a new exchange being created by its spinoff TradeWind Markets, a board member of the new venture said on Tuesday.
The protagonists of Michael Lewis’s book, Flash Boys: A Wall Street Revolt, are planning a gold exchange that would use elements of blockchain technology to improve transparency and the clearing and settling of trades, said Matt Harris, a managing director at Bain Capital Ventures. Bain has an investment in IEX.
Blockchain is a tamper-proof shared ledger that can automatically process and settle transactions using computer algorithms.
TradeWind Markets began as an internal project of IEX and was spun off as a separate firm earlier this year. In June, the startup raised $9-million, according to a regulatory filing with the U.S. Securities and Exchange Commission. A person familiar with the operation who asked not to be identified because the plans are not public, said the funding came from IEX and Sprott Inc, a Canada-based investment firm that manages physical bullion funds.
A lack of transparency is one of the problems that makes the gold market ripe for change, said Harris, who is on TradeWind’s board.
“It’s too slow, it’s opaque as to who owns what and when along the way, and there’s lots of room for error that requires manual reconciliation,” Harris said of the gold market. “A system that was instantly self-reconciling and 100 percent transparent would solve a lot of problems.”
TradeWind is lining up more equity investment partners and strategic and commercial partners for the venture, the launch of which is still months away, said the source.
IEX Chief Executive Officer Brad Katsuyama also sits on TradeWind’s board of directors, as do IEX Chief Technology Officer Rob Park and Sprott Chief Executive Peter Grosskopf.
IEX and Sprott declined to comment.
While TradeWind is not the only firm looking to use new technology such as blockchain in the gold market, its parent, IEX, has earned a reputation as an innovator in the stock market.
The new gold exchange will leverage the technology used by IEX for its new equities exchange, The Investors’ Exchange, which it launched on Aug. 19 after operating for more than 2 -1/2 years as an alternative trading system (ATS).
In Flash Boys, Mr. Lewis chronicled IEX’s efforts to build a stock exchange from scratch aimed at levelling the playing field for all investors, in part by slowing the speed of trading.
The book, which claimed the U.S. stock market favoured high-frequency traders, caused an intense debate on Wall Street over the fairness of the market. A number of investment firms backed IEX’s technology as a way of achieving a more equitable trading environment.
IEX quickly became the No. 2 U.S. alternative trading system out of around 50 such trading venues, capturing more than 1.5 per cent of market volume.
TradeWind plans to utilize the distributed settlement system in blockchain to eliminate the need for third party verification by giving participants an up-to-the-minute record of all transactions.
The London Bullion Market Association is expected to soon announce an electronic platform for gold trading and a trade repository that would help increase transparency and liquidity in the market. The London Metal Exchange also said last month it was planning to launch spot and futures contracts for gold starting in the first half of next year.
Belgium-based clearing and settlement firm Euroclear said in June it was working with blockchain services provider itBit to develop a settlement system for gold using blockchain.