TAD3: Empowering Investors with the SDEX

06 Nov 2023 12:00 By John Wooten

Prerequisite Reading: Syndicate Update #1. TLDR: The Stellar Decentralized Exchange enables TAD3 trading.

Direct investor trading is a symbol of financial liberation. 🗽 It's about breaking down barriers and democratizing finance. And in this blossoming ecosystem, each of us has the potential to grow our investments on our own terms. It's a vibrant, bustling market where anyone with an internet connection and a government ID can participate. 👤 No longer confined by the walls of traditional exchanges, direct trading hands the reins of the market back to its rightful owners—the people.

The Basics of Direct Trading

At its heart, TAD3 is about simplicity and connection. It's the financial equivalent of a farmers' market, 🌽 where producers and consumers interact without a supermarket acting as a go-between. This translates to a system where individuals like you and me can trade securities directly with each other, without a traditional broker setting the terms or taking a slice of the pie. 🍰

Exempted Transactions ⚖️

Now, you might wonder, how is this all possible? Well, it's thanks to federal trading exemptions for anyone other than an "issuer, underwriter, or dealer." Imagine the process as if you're handing over a prized painting to a friend. You have a "painting certificate," a tangible representation of your investment 🖼️. Instead of going through a centralized dealer gallery, you and I sit down to make a private deal. 🤝 On our own behalves, I agree to wire you money directly, and you sign the Van Gogh over to me. There's a sense of satisfaction in handling the transaction ourselves, without intermediaries. That's TAD3, powered by distributed ledger technology.

Efficient Secondary Markets 👷‍♂️↔️👩‍🔬

Picture this: Miguel, an early investor in an innovative manufacturing startup, can sell his shares to Sarah, a retired scientist, without jumping through the hoops of traditional systems. They find common ground in TAD3, a beacon of efficiency with no trading fees nibbling away at their finances. 🌟

TAD3 Principles 📖

Just as artists trust galleries to distribute their paintings, companies use transfer agents to manage their stock. 🎨➡️📈 There's just a smidge more compliance work on the securities side. That's why only a few companies in the entire US market act as their own transfer agent, in fear of sub-par services. TAD3 is like a public, global digital archive rather than a physical gallery on Wall Street, only for a special few. Stellar holds detailed records of every transaction, maintaining a distributed ledger that's as clear and reliable as a museum's catalog (and don't forget programmatically accessible). 🏛️

TAD3's Non-Intermediary Model 🚫🏦

TAD3 acts as a silent witness rather than a vocal auctioneer. 🤐 TAD3 don't stand between buyers and sellers, shouting out bids and offers. Instead, Stellar enables transactions directly between investors, much like a bulletin board in a community center where people can pin up offers and requests. 📌📃 (Don't worry, we have systems in place to enforce SEC trading halts.) This means that TAD3 does not profit from each transaction, but rather it allows us to facilitate the smooth transfer of ownership from one investor to another. You could think of the decentralized Stellar network as a librarian who organizes books for the depository, TAD3. 📚

Advantages ✅

When TAD3 don't take a cut, the savings are passed directly to your savings and retirements. 🤑 Imagine keeping every dollar you earn from selling tomatoes in your backyard garden instead of paying a vendor fee at the farmers' market. 🍅💵 This is the financial equivalent. By not charging fees or acting as middlemen, TAD3 empowers investors to keep more of their profits, which can then be reinvested or spent as they see fit—the ultimate financial freedom. 🎉 Moreover, this streamlined approach creates a more dynamic market, where securities change hands more freely and efficiently. 🔄

"Atomic Swaps" Make This Work ⚛️

Atomic swaps let you trade with no middlemen. 🤯 They are a revolutionary piece of blockchain technology using mathand the foundational principle behind the SDEX's global decentralized limit order book. Offersare "atomic" because either a trade happens in its entirety, or not at all. This eliminates counterparty risk, which removes the need for a centralized clearing system entirely.

Facilitating Trustless Trust 🤝

Atomic swaps are a cornerstone of direct trading in TAD3. By using automated, decentralized protocols, the SDEX lets investors privately trade securely at scale in a way never before seen. 🔐 This approach streamlines the trading process, reduces dependency on third parties, and, importantly, removes transaction fees that would otherwise go to intermediaries.

The Stellar Consensus Protocol underpins these transactions, ensuring they are fast, reliable, and tamper-proof. It's like a global farmers' market where companies can send crops to investors in exchange for payments, all through one email. 📨 The distributed network checks for fair trade conditions before finalizing all transaction. Seamless, secure, and nearly instant swaps—that's TAD3.

A Unique Network 🌐

The SDEX is part of the actual Stellar core protocol. ⛓ Most DEXes (if not all other than 0x) rely on smart contracts, external service providers, or secondary layers for trading. 🔀 Stellar's direct integration cuts out common security risks associated with those additional systems and provides a transparent, efficient trading experience. 🛡️

Regulatory Compliance 🖋️

Based on extensive legal investigation, securities trading systems using those additional technologies would today be classified as Alternative Trading Systems, which must be registered with and regulated by the SEC (example ATS which presently charges 1% trading fees). 🔍

Because they're centralized, ATSs can and do discriminate based on traditional access methods. 🚧 It’s essential to establish a fair and equitable system that provides equal opportunities for all investors, aligning with the ethos of decentralization and inclusivity that blockchain advocates. ⛓ That doesn't happen when brokers require a US social security number because they can't bother with an international "low-value" user's government ID, or transfer agents require a medallion stamp. 📄

Moreover, ATSs are "black boxes," which means you can't actually review how they operate. 🤔 Investors have to rely on regular thorough broker investigations to ensure fairness, which gets quite expensive. 👨‍⚖️ Take a guess who those compliance costs get passed on to. 🧑‍💻👩‍👦‍👦 Further, regulators can only act so quickly when it comes to the 49 ATSs in operation today. This oversight process can and does go wrong, at the expense of investors.

Despite illegality, stock exchanges and ATSs by ownership extension sell faster trading data to HFTs. That means that market makers can know the price of a stock up to three or four seconds before you. 📛 Remember, these exchanges are all for-profit corporations with shareholders to satisfy. Investor advocate Mark Faulk says:

"When the Exchange went from not-for-profit to for-profit...

the utility function of the marketplace of the exchanges disappeared.

Because once you... flipped the switch to make these exchanges, not utilities,

but for-profit vehicles, now you have shareholders to answer to...

and obviously the largest customers are the HFTs."

We need to level the playing field for all investors, regardless of their trading frequency or volume.

Transparency is key in a new, trusting financial system. We shouldn't need to worry about when our broker is trading against us. Clear, auditable processes must allow users to understand how their trades execute—that's TAD3.

Lastly, for the finance geeks, 🤓 all these different ATS trading venues split volume apart, segmenting the entire stock market. The implications and costs of this practice are very difficult to quantify, but they dramatically affect your investment returns over time. ⌚ This leads to higher spreads, a fragmented view of transaction history, and other problems detrimental to 'smarter markets.' A unified, or at least interoperable, recordkeeping system could eliminate this fragmentation. 🧮 Not one controlled by a private for-profit monopoly.

The Takeaway

There are a lot of very smart people working on the problems TAD3 solves. For instance, we spoke to a co-founder of the first widespread decentralized order book platform, launched in 2018. The system was built on extremely innovative P2P file-sharing technology, with transaction costs originally starting between 50¢ to a dollar. They got a knock on the door very early on since they'd processed millions of trades almost immediately after launching. For regulatory reporting, they told us you had to scan through dozens of Ethereum ledgers to find a certain kind of specific trading code signature to match a nuanced distributed data/math scheme. That's impossible to conduct efficiently at scale or effectively oversee.

"Someone needs to build a unified system for trading," has been heralded for decades by market advocates, researchers, and investors alike. That's why we built TAD3. If you're a public or IPO-aspiring company looking to access our platform, fundraise, or even just streamline you stock recordkeeping process, 🧮 schedule a free brief consultation here.

John Wooten

Chief Compliance Officer

Host of the Stock Market Secrets podcast, John wrote his first book on asset management in high school. Out of frustration with inefficient markets, he closed down his hedge fund after its best year ever to bootstrap Block Transfer. John graduated from Georgia Tech with a BS in Computer Engineering.