1. SCOTEX intends to attain Recognised Investment Exchange (RIE) status, a globally recognised exchange operator benchmark. It promotes investor confidence in the SCOTEX offering and increases its appeal to a wide range of equity market participants including those that must execute transactions on an RIE. It will confer on SCOTEX the same rights and privileges as the London Stock Exchange plc and other UK and European market operators.
2. Scotland has some of the brightest and best fund managers in the world. They are rightly renowned world-wide for their rigorous and disciplined long term investment outlook, their expertise in staying close to the companies they invest in, and not following short-term speculative trends. Many of them can be somewhat averse to onshore investing preferring instead to look outside Scotland for their investments. SCOTEX must take the lead in changing that mindset.
3. Innovation is key to SCOTEX. Bringing new technologies to market to create a better marketplace for companies and investors will be crucial to succeed in a global exchange market. SCOTEX must do so without incurring excessive regulatory capital costs and by making sure its systems have the performance and reliability required by all participants.
4. SCOTEX’s outlook must be rigorously long-term and it’s strategy must not be dictated by short term political and economic events.
5. SCOTEX must grow at the pace necessary to become a “Main Market” exchange. SCOTEX is not an alternative investment market for speculative investments.
Up until 1973 Scotland had its own independent stock exchange, the Scottish Stock Exchange, which was created from the merger of the Edinburgh, Glasgow, Dundee and Aberdeen Stock Exchanges in 1964. It was officially merged with the London Stock Exchange in 1973. In effect it was closed down as a working entity as all operations were moved to London.
SCOTEX now has an incredible opportunity to bring a new exchange to Scotland – and as an entirely new exchange we can bring about real innovation to the equity capital market:
We can bring profound change to the post-trade landscape through distributed ledgers thereby slashing settlement times and bringing significant cost benefits to all exchange participants. Every exchange in the world is looking at implementing this technology but they all face the intractable problem of switching from legacy systems on to very new and very different post-trade infrastructure. Without that problem to overcome SCOTEX can genuinely be the first in the world at implementing distributed ledger technology with the STARS system.
With no existing capital markets infrastructure in Scotland we can take the lead ourselves in bringing new companies to market instead of relying on the old way of banks and brokers carrying that role. We think we can bring companies to market quicker and more efficiently which improves the outcome for both issuers and investors. In future Scottish companies seeking a listing to raise capital for growth expansion will know they can access that service right on their doorstep without needing to engage with a bank or a broker in London or elsewhere.
Just 5% of large Scottish companies have a stock market listing in London, and only 10% of London Main Market companies are based in Scotland. So the opportunity for listings growth at SCOTEX is clear.
We know Scotland’s asset management firms have enormous sums of money to invest, and we know Scotland’s entrepreneurs and scientists have the talent to make investments in them produce the returns the asset managers are looking for. The link between them has been missing for 43 years and SCOTEX sees an opportunity to put that right.
SCOTEX will offer capital markets access for the next generation of scientists, inventors and entrepreneurs of Scotland. It is crucial for Scotland that its wealth creators – now and in the future – have a visible equity capital market that is able to provide them with access to the capital they need to grow their companies.
Digitally Distributed Ledgers is a new approach to data management and sharing that is being proposed as a solution to many of the inefficiencies afflicting the industry. The prize on offer is a new architecture, where all capital market participants work from common datasets, in near real-time, and where supporting operations are either streamlined or made redundant.
Using a distributed ledger – a term which describes a database architecture where all nodes in a system collaborate to reach a consensus on the correct state of a shared data resource and where there is no critical central master database – will mean transforming the recording of transactions from electronic certificates and databases to an audited record of the lineage of ownership of private securities.
The system will act as a central repository for details of all trades, validated based on a mathematical formula running on the computers of participants, allowing assets to be transferred without using a centralised agency such as a bank or a clearing house. Decisions on what goes into the ledger are based on cryptography and consensus mechanisms.
Trades executed on a DDL platform can be settled within fifteen minutes. This will be a fundamental change to equities trading and mean enormous cost benefits for all market participants.
How does it work?
Transactions are recorded on the STARS distributed ledger. All transactions are stored in a string of digital blocks, with each block referencing the prior one. This series of blocks record the current state of share ownership:
Each block has what is called a hash. The hash in a certain block is dependent on the hash in the previous block and the transaction(s)/data being stored in the current block.
The following illustrates what happens during a share transaction:
Participant A buys 100 shares of Scottish Resources Plc from Participant B.
Participant A sends funds to Participant B. A new block is created:
The transaction is broadcast across the network. A block of transactions is only added to the chain if it is verified by cryptographic techniques using significant computing power. The nature of the verification process is such that the validity of any block can be verified easily and quickly, effectively eliminating the possibility of fraudulent transactions and making it impossible to retroactively alter any single block of the chain:
The block is added to the chain which records the entire non-reversible history of the transaction. The database is distributed, i.e. all users are notified immediately of new additions to the ledger. The distributed nature of the ledger allows for all users to have a verified and secure version of the ledger at all times:
Participant B receives cash from Participant A. The trade has been completed.
So which exchange can possibly migrate to a system like STARS when they have legacy systems totally embedded into their operations? Only SCOTEX can.
SPX: SCOTEX Primary Market
SPX is where primary share issuance will take place and will be the “home” exchange of companies issuing primary shares. Primary share issuance is the listing of shares by companies to raise capital e.g. via an initial public offering or a rights issue.
SGX: SCOTEX Global Market
SX2 is where the SCOTEX members can buy and sell the shares of UK Official List companies as well as shares on other major global markets. It will allow members to swap crypto holdings for shares without first having to convert to cash. SGX is not a secondary exchange and not a MTF.
SCX: SCOTEX Crypto Exchange
SCX will be a marketplace for the trading of cryptocurrency instruments. It is planned that SCX will support the following crypto currencies:
SDX: SCOTEX Crypto Dark Exchange
SDX will be a decentralised open-source dark pool protocol facilitating swaps between cryptocurrency pairs across the Bitcoin and Ethereum blockchains. Trades are placed on a hidden order book and are matched through an engine built on a multi-party computation protocol. This provides order execution without exposing market sensitive information such as price and volume at a certain position.
SCOTEX also expects to introduce a facility called University Private Accelerator (SUA) which will facilitate the raising of capital by spin-out companies from Scottish Universities.
SCOTEX needs to be a primary exchange to issue IPO’s and only RIE’s can be primary exchanges. Furthermore many fund managers are only allowed invest their assets under management in companies listed on an RIE.
What authorisations do you need apart from FCA authorisation?
STARS will need to be a Designated Payments System (DPS). The Payment Systems Regulator (PSR) has oversight of DPS’s. We don’t expect to require Recognised Clearing House (RCH) status from the Bank of England as STARS will not be clearing trades. (STARS will act as a pre-trade screen for SCOTEX to ensure only firm and deliverable orders that dont need clearing are accepted into the central order book).
Banks and brokers have a relatively small footprint in Scotland – how will companies come to market on SCOTEX?
We expect that to change in time but in the interim SCOTEX plans, with regulatory permission, to bring companies to market on its own exchange. This means SCOTEX will assist in producing the prospectus, arranging roadshows and bookbuilding etc. We think this kind of exchange evolution is appropriate for SCOTEX with the correct systems and controls in place. SCOTEX will not underwrite IPO’s.
What are SCOTEX’s projected market opening hours?
Depending on participant feedback SCOTEX may run two central order book sessions for its primary market: 0800hrs to 1030hrs and 1300hrs to 1630hrs. Auctions will be run at 1100hrs and 1200hrs. The Tokyo Stock Exchange runs two central orderbook sessions so there is precedence for this.
Can non-Scottish companies list on SCOTEX?
What is the size of the opportunity for SCOTEX in terms of the exchange space?
There are over 2000 large companies (employing > 250 people) in Scotland without a stock market listing so there is a great opportunity there. SCOTEX has a target of getting 3% of those to market by 2020 and 7% by 2025.
What is the size of the opportunity for SCOTEX in terms of the post-trade digital ledger space?
Potentially enormous. Worldwide there are potentially hundreds of millions of dollars to be saved through applying blockchain technologies just to securities trading and ownership.
Will SCOTEX be an AIM-style exchange?
No. Scotland’s fund managers overwhelmingly want to invest in dividend-paying middle-market growth companies and large caps, not speculative sub-market companies. It is important that SCOTEX positions itself as a Main Market exchange and aligns itself with the investment framework and goals of Scotland’s asset managers.
Who does SCOTEX see as it’s main competition?
Those companies working in the emerging digital ledger (blockchain) post trade and securities ownership space.
When will you launch full exchange operations?
We are targeting Q1 2019.
SCOTEX will be a Primary Market for Scotland-based companies. This means that SCOTEX will be the exchange on which Initial Public Offerings for Scottish companies can take place and the exchange that regulates and monitors those companies to ensure that they fit the criteria of being a UK Official List company on an on-going basis. Shares may also be introduced to the SCOTEX exchange by way of Placement without a company issuing new shares via an IPO.
If your company meets the following criteria and you are looking for access to the growth capital that can take your business to the next stage of expansion please talk to us about being one of the official SCOTEX Launch Companies.
- Three years of audited accounts with consistent revenue streams and earnings
- Sufficient working capital for at least 18 months from the date of listing
- A strong and experienced management team
- An effective and independent company board
- Evidence of market share or marketable intellectual property
- A clear statement of the use money raised in the listing will be put towards
- Overall a compelling and clearly investable business proposition with strong growth prospects
SCOTEX will offer you:
- Your shares traded on an orderly and transparent exchange running on a high performance low latency electronic trading platform, complete with the latest electronic surveillance software. The platform will be a fully hosted and technically administered system with a complete redundancy solution.
- A complete listing advisory solution including Official List application, preparation of listing documentation including the prospectus, organising investor roadshows and book-building.
- A complete Investor Relations solution so that once shares are live and trading on the SCOTEX platform you are free to carry on running your business without worrying about the important task of investor outreach.
- The visibility and credibility of a stock market listing that will greatly expose your business proposition and help you to attract and retain the best staff for your business.
Contact email@example.com for more information.
Due Diligence Notice: As a Primary market SCOTEX must maintain the public’s confidence in companies listed on the exchange by ensuring that they meet all their regulatory and reporting requirements as well as UKLA listing requirements. SCOTEX will undertake thorough due diligence on companies that are candidates for listing and being a SCOTEX Launch Company may entail more stringent checks than would otherwise be the case. This will involve doing the following: checking for bad company debts, background checks on all people within the company that have a position of influence, and checking the business is run in a manner that is fit and proper. SCOTEX may also discuss your company with suppliers and other companies in the industry. SCOTEX will also monitor debt levels at companies listed on the SCOTEX Primary Market to ensure they are not leveraged at a level that may hurt equity holders.
Currently UK stocks are settled and cleared using a system developed in a world of paper-based systems that has changed little since 1968. It is costly and inefficient and SCOTEX sees an opportunity to look find a better way of operating the market for the benefit of investors and companies using a new approach to data management and sharing that is being proposed as a solution to many of the inefficiencies afflicting the industry. The prize on offer is a new architecture, where all capital market participants work from common datasets, in near real-time, and where supporting operations are either streamlined or made redundant.
Using a distributed ledger – a term which describes a database architecture where all nodes in a system collaborate to reach a consensus on the correct state of a shared data resource and where there is no critical central master database – will mean transforming the recording of transactions from electronic certificates and databases to an audited record of the lineage of ownership of private securities. The system will act as a central repository for details of all SCOTEX trades, validated based on a mathematical formula running on the computers of participants, allowing assets to be transferred without using a centralised agency such as a bank or a clearing house. Decisions on what goes into the ledger are based on cryptography and consensus mechanisms.
We are calling the new post-trade system STARS: Secure Transaction Affirmation and Reporting System. It will mean:
- Trades will settle almost immediately with no need for post-trade clearing (guaranteeing) of trades.
- Trading will be much cheaper for everyone as users will be charged a low flat fee to access the ledger rather than being charged per transaction in a captive system.
- Sellers will get their money almost instantly and no later than 15 minutes after executing a stock sale.
- No need for post-trade affirmation or confirmation and central clearing during the settlement cycle.
- Reduced scope for data errors, disputes and reconciliation lags, speeding up the end-to-end trading process since all participants operate from their own local version of the golden source.
In the current system each link the chain between investor and company is a cost met by investors and companies alike:
SCOTEX intends to disintermediate the parties that make up the costly and inefficient link that currently exists between investor and company:
In our target operating model SCOTEX and STARS is the only link between investor and company:
There is no mass demand placed on any central authority, reducing the risk of it being overloaded. Counterparties can bilaterally reveal information to each other without querying the centre. With no central authority, there is no single point of failure. Trades are irrevocable once agreed, so there is a reduced risk of manipulation.
The industry would no longer operate at the speed of the slowest trade: the investor selling to a counterparty without the funds to complete the trade when it is executed has to wait until that counterparty has either been loaned the money or is able to liquidate other assets. Likewise the investor buying from a counterparty who has loaned her or his stock to another party has to wait for the completion of another transaction before the deal is able to finalise. Long term investors and debt-averse investors are effectively penalised while frequent investors who are able to use the existing system for their own short term benefits are the effective winners from this system.
We also move away from CCP risk: the current CCP model forces investors to trust in the risk models employed by the CCP. This pooling of risk is unavoidable for investors and creates an additional risk to investing. CCPs are risk poolers, not insurance providers. S.T.A.R.S. removes this risk: buyers unable to come up with the money to complete a transaction are not able to enter a price into the market in the first place; likewise sellers without the shares they have promised to deliver are not able to enter a selling price for those shares. Therefore no individual investor takes on the risks of any other investor defaulting on an agreement or not being able to deliver securities for sale.
Don’t just take our word for it. Here is what leaders in the exchange and equities world say about distributed ledgers:
“I am a big believer in the ability of technology to effect fundamental change in the infrastructure of the financial services industry. Clearing houses are a wonderful invention, but if you have a public ledger that is trusted, you can evolve back to a bilateral (trading) world but proceed with instantaneous settlement. We currently settle at T+3 (three days after the trade occurs). Why not settle in 5-10 minutes?” (Bob Greifeld, CEO Nasdaq)
We’re now building a beta version of a clearing and settlement platform (using a distributed ledger) for equities… There are about $4 billion to $5 billion of cost in the system. Those are paid for by listed companies and investors. In that number, I’m adding up the exchanges, clearinghouse, CSDs, the registries, the depositories, data vendors, platform providers, technology providers – everybody in the system. We think there is an opportunity to look at that cost and ask ourselves if there is a better way for the market to be operating… The post trade environment has not had the investment in innovation that the trading environment has had over the last five to 10 years. We’re still sitting on 20- and 30-year-old systems. We think it’s time to see what we can do there. (Australian Stock Exchange deputy CEO Peter Hiom)
We believe blockchain could drive greater efficiencies in the US cash equities market, primarily through streamlining the post-trade settlement and clearing processes. By reducing the duplicative, often manual affirmation and reconciliation of trades across buy-side clients, broker-dealers, trust/custody banks, and the Depository Trust & Clearing Corporation (DTCC), we believe blockchain could result in an estimated ~$2 bn in annual cost savings in the US (both explicit and economic costs). On a global basis, the benefits would likely exceed $6bn in annual savings assuming costs are proportionate to market cap. (Goldman Sachs)
You can argue the blockchain is a Copernican moment in finance; that the concept of a mutual distributed ledger, with truth and trust being the responsibility for the whole community, shifts finance from a system dominated by large, centralised institutions to one which is more diverse, and much more based on peer to peer transactions. (Bank of America Merrill Lynch)
How is all this possible? Yes – via Digitally Distributed Ledgers
SCOTEX: Potentially the first out of the gate
The uses for distributed ledgers don’t just apply to transactions in financial markets. In a World Economic Forum survey, 73.1% of respondents noted that they expect taxes to be collected using a blockchain by 2025, while 57.9% said they expect 10% of global GDP to be stored on blockchains by this time. There have been more than 150 venture capital-backed deals in distributed ledgers companies in the past two years as investors realise the potential rewards of getting solutions to market. Without a legacy system to migrate over from, the potential value to SCOTEX of being the first out of the gate to run a regulated stock exchange with a distributed post trade ledger could be significant. SCOTEX shareholders will share in all IP generated from the STARS system.