The concept of atomic swaps can be used in traditional trading on the stock markets to facilitate direct exchange of shares on the stock exchange without the need to sell assets for cash.
On traditional exchanges, retail investors public markets can’t switch from one position to another without the transfer of an asset into cash. For example, an investor who wants to sell their shares of Amazon for shares PayPal, must first exchange their shares of Amazon for dollars, and then for them to buy stocks with PayPal.
This kind of sharing creates unnecessary friction and costs by:
transaction costs related to the sale of the asset, and the purchase of a new asset;
the risk of changes in the dollar;
fees paid to the broker, as well as the difference between the rates of the seller and the buyer, which exists for each publicly traded stock (and also has a place in the sale of previously held assets and the acquisition of a new asset).
In the context of cryptocurrencies atomic swaps is a feature that could allow the direct conversion between the two cryptocurrency without the use of third-party broker or exchange. Atomically swaps use a hash that acts as a lock for the smart contract, and it guarantees that both parties will list the currency necessary for the implementation of the transaction, or the transaction is automatically canceled.
These transactions are «all or nothing» provide atomicity, because they will either be committed or cancelled. For example, the client A may directly sell your bitcoin or airtime to client B with full confidence that the transaction will either be completed or terminated in case if one of the parties does not fulfill its conditions.
Atomically swaps stock
The application of the principle of atomic swaps for a direct exchange of the shares (on the stock exchange is an atomic swap of shares), allows investors to avoid forced conversion to cash, which inevitably occurs when you need to sell one share for dollars to then buy them for another campaign.
It is common to switch between the positions of the shares for retail investors and financial firms, and if you eliminate it from the equation, it is possible to avoid transaction fees that typically arise when making such transactions, as well as to save on consolidation the difference between the rates of the seller and the buyer. At the same time as major cost savings will be responsible to direct the exchange of shares, additional savings will be possible thanks to the leveling issues with the difference between the rates of the seller and the buyer.
Exchange is an atomic swap of the shares could effectively work with large players with deep pools of liquidity, such as assets of the companies included in the S&P 500 index. The liquidity required for transactions would be provided to traders in the field of high-frequency trading (HFT), which would compensate for the existing difference in price.
This will lead to reduce the margin HFT, but it is likely that traders would prefer to regard these transactions as an additional method of gaining income (if they have no other possibilities).
Focusing on the needs of the average retail consumer, it becomes clear that in many cases the sale of shares for cash – an emergency measure and does not reflect the real desires of the investor.
The exchange is an atomic swap of the shares: example
For ease of example let’s imagine that we are only the S&P 500 index, and that we want to trade Google stock for shares of Facebook. Because they’re both denominated in US dollars, there is a price ratio of one share to another. At market close on may 4, 2018, one share of Google cost 5.95 stock Facebook. In this hypothetical exchange of shares fractional, and you can exchange one share of Google stock 5.95 on Facebook and Vice versa.
The difference between the prices in this case will affect the number of Google shares you receive in the exchange. You will receive only 5.93 shares of Facebook in the framework of this exchange and market maker will receive 0.02 shares of Facebook in exchange for the implementation of the transaction.
Similar dynamics potentially can cause problems because market-makers are now paying stocks. However, such an exchange will allow them to make a profit, thanks to the strengthening of these shares during the trading day. However, nothing would prevent HFT instantly liquidate shares, which they receive for cash if someone will undertake the implementation of this transaction.
The dynamics of exchanges
Exchange is an atomic swap of shares will not be charge for sharing. Profit can be obtained by selling the flow of orders and right to trade on this exchange for HFT. As the process of buying and selling stocks can be done? When you’re placing an order to sell, it specifies what position the firm would like to exchange, and assuming that this deal is available, it performs a simple swap of shares. In this case HFT can lose your weight as market maker, and the ability to profit from the price difference. This could be a way to make a profit, and many exchanges are trying to hide the fact that they earn money on the retail investors.
What to consider
Here are some points that need to be considered before the introduction of the concept of atomically swaps in a process of direct exchange of shares.
What is the main problem that must be overcome to create an atomic Exchange swap stock?
It is essential to understand how to carry out the purchase decimal stake and how to associate users who really want to exchange shares with each other. In the private market contractors have a wide control over their trade agreements, but on the public markets this feature is not yet available.
In other words, to atomically swaps for stocks become a reality, the exchange should have the ability to divide the shares in decimal. When we consider that for retail user E-Trade or Charles Schwab an exchange value Amazon shares on Facebook is selling one and buying the other, and each transaction requires payment of a fee per transaction, it becomes clear that the amount of such exchange becomes too large for the retail investor.
However, in order for the exchange is an atomic swap of shares was profitable, it would have to support huge trading volume.
Equivalent if decimalization
shares on the public markets is similar to the division of share prices?
Until 2001, all stock prices in the United States were quoted in increments of 1/16 of a dollar, which made it impossible for arbitration, but also created massive problems in the markets. If decimalization minimum price movement now is one cent, which allows to increase the difference between the rate and the level of demand. For example, stocks can be divided to five decimal places, equivalent to allowing trade in shares.
Can the theoretical lack (or shortage) of money to be a problem for such exchanges?
Many exchanges earn money that were not invested in accounts in the money market. The exchange is an atomic swap of the shares could also use these types of cash.
What about liquidity?
The exchange is an atomic swap of shares may be created based on existing exchanges, meaning that retail investors can switch into cash position if they want to.
Are there any similar deals?
Institutional investors can execute a pair of transactions in which they do not have to exchange stock for cash. But retail investors are missing this opportunity.