Open Source

As information on the 2008 market collapse unfolds, the world is waking up to the fact that the inner workings of our equity markets matters.

In this last year, we've discovered that or financial institutions are holding massive quantities of toxic debt. Even more freightening is the prospect that insiders have been manipulated the transaction process in ways that have deepened the hardships created by the market collapse.

There is a growing demand for greater transparency.

Considering the imporatance that the stock market has in our society, I contend that the stock market itself is a prime candidate for open source development. Open source development would invite all of the participants into the process of creating a more stable and secure trading platform.

The Current Regulatory Regime

From my point of view, the current trading system appears to be neither stable nor secure. The data seems to indicate that in times of economic turmoil, there is often a spike in failed deliveries.

In the current trading system, the actual transfer of stock takes place in a mysterious black box entity called the Depository Trust & Clearing Corporation (DTCC). The DTCC is a business coop owned and directed by major banks and stock brokerage firms.

When you buy a stock on the open market, you do not get the stock on the day of purchase. Instead your stock broker places an IOU in your account then ships your order off with the rest of the orders in a batch for processing.

The actual stock trade might take place several days after you place a buy order on the open market. Both the iou and stock could trade hands several times between your order and the transfer of the stock in your account.

The public at large does not no what goes on inside the DTCC.

BB v OS

The black box design of the DTCC was made in a day when people felt that the best path to security was obfuscation. Thirty years ago, people felt comfortable with a system where transactions entered a black box and popped out as owned shares three days later.

Since 1976, information technology has advanced to the point where hackers are often able to reverse engineer the inner workings of black box systems. There is also the possibility of regulatory capture.

The black box thinking behind the DTCC appears to me to be antiquated and open to abuse. The best solution is to move to a transparent open source design where each transaction has a clear audit trail.

An open source system would invite all of the groups participating in the exchange to scrutinize programming code and procedures. The full audit trail would give people a mechanism to detect and report abuse.