(TIỂU LUẬN) IS BLOCKCHAIN TECHNOLOGY CAPABLE OF RESOLVING ISSUES WITH THE STOCK MARKET

RMIT University Vietnam BAFI3182: FINANCIAL MARKETS Semester 3, 2021 (2193) Assignment 3: Individual Research Project Assignment Cover Pag Subject name Financial Markets Subject code BAFI3182 Location and campus Sai Gon South Campus Type of assignment Individual Assignment Assessment name Individual Research Project Student name Vu Truc Thanh Nghi Student number S3878688 Lecturer Huy DB Due date 14 Jan 2022 at 23:59 Number of pages 11 pages Word count 2664 words PART A: INDIVIDUAL RESEARCH REPORT: IS BLOCKCHAIN TECHNOLOGY CAPABLE OF RESOLVING ISSUES WITH THE STOCK MARKET? Abstract: Blockchain is developing as a crucial technology in the Fourth Industrial Revolution that has the potential to revolutionize how we live and work As a result, scholars have long debated the question of blockchain's use in a variety of sectors Many businesses, especially financial institutions, have put significant resources into researching and developing their blockchain systems Nonetheless, the notion of using blockchain to rebuild the stock market is popular but divisive As a result, this paper will examine experts' perspectives on the subject, first discussing the nature of the stock market, high-frequency trading (HFT), and blockchain technology to determine how the decentralized blockchain can overcome the current centralized stock market's inefficiencies, transparency, and cybersecurity However, some argue that the government is finding it more difficult to construct a worldwide blockchain-based stock market akin to Bitcoin I: Introduction: The notion of decentralized money became realistic when Satoshi Nakamoto wrote a paper in 2008 describing Bitcoin and Blockchain technology People began to pay greater attention to blockchain technology as Bitcoin became more prominent Blockchain was named as one of the primary drivers of the future society in a document issued by the World Economic Forum in 2017 As a result, several governments are researching how blockchain might be used in a variety of industries, including supply chain, healthcare, and finance (Adityaa 2018) The subject of whether the centralized stock market can be transformed into a decentralized blockchainbased system has been discussed for a long time, but many people are still skeptical about its practicality Most investors are aware of the centralized stock market's numerous disadvantages, including its sluggish clearing and settlement procedure, high transaction costs, lack of transparency, and lack of cybersecurity HFT has gotten a lot of press in the last decade since it is supposed to vastly improve market liquidity and quality (Capgemini 2020) It was also stated that it was the cause of the 'flash crash' (Chen 2021) Due to these flaws, the distributed ledger, blockchain, has been proposed as a solution to these issues, making stock trading faster, cheaper, and more secure Certain experts, however, are concerned that there are still some difficulties that prevent the creation of a worldwide blockchain-based stock market As a result, Section II examines the regular stock market, Section III provides a brief description of HFT, and Section IV addresses our key question: how likely is it that blockchain will be used to trade stocks II: Stock market: A: Definitions: Stock markets are an important part of the economy since they help firms generate funding for their investments 'An aggregation of buying and selling offers matching to an asset' is how the stock exchange market is defined Individuals’ assets are offered by the issuer, and those who buy or exchange them are known as investors Dealers and brokers operate as middlemen, matching the demands of parties and facilitating transactions Through brokers, all stock trading operations are gathered and performed in a centralized program called Stock Exchange The restrictions implemented by the government of the nation must be followed by stock exchange participants When an investor places an order, the system will wait for it to be matched Then comes the actual transfer, which entails exchanging the physical object for monetary value or vice versa The Clearing House and Settlement Platform must take many measures to accomplish this As a result, most transactions are completed within three business days, implying that the assets and money only change hands after three days (Antal 2018) B: Drawbacks: The biggest disadvantage of the traditional stock market, according to Antal in 2018, is that a third party regulates and implements all trading activity According to Guo and Liang's 2016 research, the clearing and settlement procedure is lengthy and costly, making it difficult for investors to sell or acquire stocks, despite the high transaction costs are concerned that such a centralized point might be exposed to assaults and failures Furthermore, they stated that "stockbrokers and dealers frequently engage in a variety of actions ranging from blatant fraud to somewhat less than legitimate." They can engage in 'pump and dump' operations, in which they buy low-cost stocks, make false and deceptive claims to boost the stock's price, and then sell them back to the public at artificially inflated prices III: High-Frequency Trading: Based on Bias reported that HFT is a technical means of establishing trading strategies and has been described as a "natural evolution of the securities markets." Biais went on to say that it used advanced technical developments to assess market data and exploit trade opportunities in as little as a few seconds to a few hours, all without the need for direct human intervention Because the delay between the delivery of information and the execution of the order is only milliseconds, this procedure is significantly faster than before HFT traders compete by using high-speed connections, computers, and software Furthermore, the closer they are to the trading venue, the quicker their high-frequency trading will be This, however, sparks a heated public discussion According to some, it reduces costs and enhances market trading volume and liquidity Others worry that high-frequency trading increases volatility, such as flash crashes, and systemic risk, as well as creating an unequal playing field in terms of speed competition HFT businesses can have an impact on the equity market's stability and integrity They are hesitant to advertise them since they are not required to, which irritates certain authorities (Zuss 2021) IV: Blockchain: A: Definition: According to Liang, blockchain was presented in 2020 as a "decentralized, distributed, and public digital ledger" that allows individual users to enter and preserve data but not remove or edit it As shown in Figure 1, a blockchain is made up of blocks, each of which contains a collection of data as well as the hash of the preceding block Crosby said that every transaction is protected by a digital signature, which means that the transaction is delivered to the receiver's 'public key' and signed by the sender's 'private key.' Then, using a consensus process, it is confirmed by other nodes before being formally published on the blockchain When new data is uploaded, it immediately updates, ensuring that each member has a complete copy of the blockchain The verification procedure takes about 10 minutes on average (Epiq 2019) As a result, hacking the blockchain is almost hard since tampering with the data requires manipulating at least 51 percent of the participants (Yoo 2017) Crosbysu describes what happens when a transaction is made on the blockchain in Figure There are main types of blockchain by Thibodeau in 2019: Public Blockchain: This form of blockchain allows anyone to join without needing to be approved first They may also use the blockchain to accomplish all actions Private Blockchain: Private blockchain, on the other hand, requires authorization to join the blockchain ecosystem Only those who have been authorized can read or write to the blockchain In some situations, the blockchain authority will grant some nodes the ability to write while others will only be able to read Consortium Blockchain: For stock exchanges, however, hybrid is the ideal solution It only permits a small number of individuals to write, but everyone can read it B Advantages of Blockchain: When compared to earlier data-storage methods, blockchain demonstrates its relative advantages It is, first and foremost, more secure and transparent (Bhandarkar 2019) Furthermore, according to Bhandarkar, any data contributed is encrypted using advanced encryption and connected to the preceding block, making manipulation impossible Furthermore, information is entirely decentralized, as it is updated and saved across various computers of users, and everyone can track information from the beginning Second, because blockchain is a user-controlled network, any user may both enter and verify data from others, eliminating the need for third parties This leads to the third benefit: we may be able to eliminate the cost of third-party services C The use of blockchain in the stock market: Many academics recommend using a consortium blockchain for the stock market Except for writing on the blockchain, everyone should be able to witness stock transactions If they wish to invest, they should be required to register in order to obtain writing permission, similar to how they must open a stock trading account with a bank By implementing smart contracts, which are "a computerized transaction system that implements the term of the contract," blockchain eliminates the need for brokers or dealers (Laroiya 2020) Yoo said that after users have set criteria, the transactions would proceed automatically and the result will be sent to the parties involved As a result, we could avoid unscrupulous brokers and save money on transactions Furthermore, according to Lee, fast verification clarifies ownership rights and prevents spoofing, which occurs when a seller makes an ordered transaction with no intention of completing it, or naked short selling, which occurs when a seller does not intend to deliver stocks on the settlement date because blockchain does not update the trade until it is completed It would safeguard the market's sustainability and the value of firms' stock (Lee 2016) This author also suggested that devoting a few minutes to verification would help avoid a flash crash by smoothing out difficulties created by computer algorithms Furthermore, Bhandarkar noted that if blockchain is used on a global basis, it would encourage investors to trade stock outside of their home nations if they are linked to the blockchain, which is impossible in the traditional stock market (Bhandarkar 2019) Many scholars, however, are skeptical about the blockchain-based stock market's viability Miraz questioned if traders are willing to transact because the settlement procedure is rapid This may necessitate a shift in conduct (Crosby 2016) Furthermore, an experiment was done, which revealed that whether a transaction charge in a decentralized system is favorable or not depends on the number of orders booked and the trading value, casting doubt on the predicted reduction in transaction costs in the decentralized market Data openness, although beneficial to certain investors, will be a problem for others who not want to be exposed to the public Will they be glad to embrace the new stock market now that the function of middlemen has been eliminated? Because of these factors, individuals may be hesitant to join the new stock market, since people are naturally resistant to change Instead of replacing the old one, it is suggested that an alternate platform be built, giving consumers additional options according to their tastes (Lee 2016) Not only blockchain-based stock exchanges face opposition from some players, but they also increase the need for new rules, according to numerous academics Yoo in 2017 stated that decentralizing the stock market will necessitate reforms in financial regulation and financial institution system transformation The present stock exchange's scalability implies that it will not be suitable until blockchain's performance meets that of the old system (Lee 2016) Furthermore, each country's government must address countryspecific data localization requirements to implement a worldwide blockchain-based stock market Abdallah did a test to check if the suggested platform, shown in Figure 3, could manage the present stock market's transaction demand The trial demonstrated the blockchain-based platform's capacity When compared to the old approach, this one performs better in terms of throughput, latency, and channel use (Liang 2020) These are encouraging signs for the final solution to this problem V: Conclusion: Finally, while several publications have proved the promise of using blockchain in the global stock market, there is still skepticism regarding its feasibility So far, we've uncovered several flaws with the regular stock market and high-frequency trading Thankfully, blockchain technology is a fantastic answer for addressing these issues Nonetheless, this theoretical idea remains divisive, particularly in terms of how legislation should be employed to regulate this market Moreover, despite the growing interest in the new sort of stock market, many players may be opposed to it However, the world is always changing, and the use of blockchain in the stock market may be only a matter of time before regulators are ready to adopt it, as the ASX has already done This paper sheds light on the roadblocks to blockchain's use in the stock market, highlighting the need for more research on this topic from not only researchers but also regulators around the world VI: Limitations: Abdallah 2020's experiment, which is used as an example in this work, makes use of restricted resources As a result, the experiment serves only as a starting point for additional research and larger-scale investigations Furthermore, while I and other experts have argued which sort of blockchain should be utilized in this application, very few have explored which consensus model should be employed As a result, I encourage further research in this area VII: Appendices: Figure 1: An example of a Blockchain Transaction in its simplest form in 2018 Figure 2: Using Blockchain Technology for Financial Transactions in 2016 Figure 3: Architecture of the system in 2020 VIII: References: Aditya, P 2020, A Decentralized Marketplace Application on The Ethereum Blockchain, nsl.cse.unt.edu, viewed 18 January 2020, Capgemini n.d, High-Frequency Trading: Evolution and the Future, www.capgemini.com, viewed 23 June 2020, Chen, J 2021, High-Frequency Trading (HFT), www.investopedia.com, viewed 25 August 2021, Antal, C 2018, Decentralizing the Stock Exchange using Blockchain An Ethereum-based implementation of the Bucharest Stock Exchange, www.researchgate.net, viewed September 2018, Liang, 2016, Blockchain application and outlook in the banking industry, jfin-swufe.springeropen.com, viewed 24 January 2016, Liang, Y 2020, A Blockchain Prediction Model on Time, Value, and Purchase Based on Markov Chain and Queuing Theory in Stock Trade, en.x-mol.com, viewed November 2020, Epiq 2019, Yes, Blockchain Can Be Hacked: Ways It Can Be Done, www.epiqglobal.com, viewed 16 April 2019, Yoo, S 2017, based financial case analysis and its implications, www.readcube.com, viewed 16 April 2017, Thibodeau, M 2019, Types of Blockchain Explained, hedgetrade.com, viewed 17 April 2019, Bhandarkar, 2019, DIGITAL STOCKS USING BLOCKCHAIN TECHNOLOGY THE POSSIBLE FUTURE OF STOCKS? iaeme.com, viewed January 2019, Lee, 2016, New Kids on the Blockchain: How Bitcoin’s Technology Could Reinvent the Stock Market, repository.uchastings.edu, viewed December 2019, PART B: REFLECTION ON THE INDUSTRY TALK: Mr Bui Sy Tan gave us an excellent presentation on how to manage your finances throughout your life's stages He made a distinction between financial stability and financial wellbeing, for starters Financial security refers to having enough money to live comfortably Financial wellness, on the other hand, is the capacity to efficiently manage your finances This may be accomplished in a variety of ways, including sticking to a budget and making long-term planning As a result, he emphasized the value of saving money and investing, as well as the importance of avoiding paying for non-essential items However, because it is more volatile than the others, many people lose money and leave the market within a short period As a result, we must expand our understanding before beginning our investment This Financial Markets course has helped me get some fundamental financial market information, such as the bond and equities markets, which individuals should be aware of in their later years of life We studied the many types of bonds and stocks, as well as their risks and typical returns Mr Tan also highlighted that we should invest according to our risk appetite For example, if we are adventurous, we should invest 100% in stocks, however, if we are conservative, we should put a portion of our money in bonds Mr Tan also highlighted that we should invest according to our risk appetite; for example, if we are adventurous, we should invest 100% in stocks, however, if we are conservative, we should invest a portion in bonds and the rest inequities We could better create our investment portfolio based on our risk appetite and capacity if we combined what we've learned so far with what we've learned so far To summarize, he provided us with some helpful advice First and foremost, an investment opportunity may be one of the few possibilities you have to change your life It implies that if you take advantage of the correct chance, you may improve your financial stability and overall health Second, we should not waste time lamenting missed chances since they will never come again Instead, we should be more upbeat and proactive in our outlook Last but not least, the finest preparation for the future is knowledge and attitude Overall, I gained a lot of knowledge from his guest talk Nevertheless, I would like him to speak more about some saving topics, such as whether we should use credit cards or not because while many people praise credit cards for their convenience, others argue that they cause you to spend more than you should; or different types of funds and insurance That would be more applicable when I am between the ages of 20 and 45 because he provided many investment tips, but as he stated, we should only put the money once we are in our middle years  .. .IS BLOCKCHAIN TECHNOLOGY CAPABLE OF RESOLVING ISSUES WITH THE STOCK MARKET? Abstract: Blockchain is developing as a crucial technology in the Fourth Industrial Revolution that has the potential... have proved the promise of using blockchain in the global stock market, there is still skepticism regarding its feasibility So far, we''ve uncovered several flaws with the regular stock market and... this market Moreover, despite the growing interest in the new sort of stock market, many players may be opposed to it However, the world is always changing, and the use of blockchain in the stock