There has been much debate recently surrounding the notion of decentralized finance. Not only have we heard of esoteric crypto-currencies like bitcoin and new exchange entrants like IEX but now, on Aug. 17 August, after 117 years, the traditional London silver fixing will finally be given up.
When the London Bullion Market Association (LBMA) created the silver fix back in 1897 it served an important purpose. Major participants in the silver market came together every weekday morning to measure various bids and asks across the marketplace in order to ‘fix’ a silver price and help clear the greatest amount of silver possible. For a long time, this mechanism played a crucial role in providing some level of certainty in the growing silver market, compressing bid/ask spreads worldwide. Or to put this way, historically the London silver fix improved efficiency in the silver market, benefiting retail and institutional participants alike.
In over a century of operation, the London silver fix has seen two world wars, men on the moon and the rise of the internet; and now its time too has come. The notion of major brokerage houses and banks coming together to agree upon a silver price in the absence of any sort of third-party scrutiny does not sit well with market participants in a world driven by instantaneous access to information. Through the ages, man has been inspired by conspiracy theories, often induced by relevant observations such as the agglomeration of much market power in the hands of very few. With regards to the London silver fix, the notion of several men sitting in a smoke-filled room to determine the global price of silver has some truth to it.
For a while now, society’s renewed interest in transparency and decentralization has been manifesting itself in myriad ways across Western culture, and it is finally hitting financial markets too. With the publication of Michal Lewis’ Flash Boys just over six weeks ago, the traditionally opaque world of high-frequency trading (HFT) was made more accessible to the non-trading community. Realizing that only a handful of major HFT firms account for a significant part of daily exchange-traded volume in the United States and that those firms have, for all intents and purposes, nay have an information advantage; public backlash was immediate. The apparent hero in the book turned out to be a man named Brad Katsuyama, the founder of an anti-HFT exchange called IEX. While Katsuyama did not set out to make the firms participating in HFT operations obsolete, he did attempt to shed some light on their operations in order to level the playing field somewhat, thereby improving the efficiency of markets. Driven by similar forces to the ones behind the end of LBMA silver fixing, IEX is capitalizing on a major shift towards decentralization, seizing the opportunities entailed in the democratization of information brought about by the internet.
To those interested in distributed finance, the Holy Grail has become independence from central banks; arguably the most opaque of financial institutions. In the minds of some, the trend towards democratized finance is leading directly to decentralized crypto-currencies like bitcoin. With regards to this alternative currency, easy access to information worldwide is helping market participants bypass potentially antiquated institutions like central banks, shifting the rights and responsibilities of currency creation and management from unelected academics to open-source algorithms. In light of the fact that market efficiency stems from equality of information, one could argue that an open-source, consistent and global electronic currency will lead to greater efficiency across the board. Many, particularly interested parties like banks and traditional money transmitters, argue just the opposite.
While it is impossible to predict the future, especially in such nascent a market like crypto-currencies, the trend towards decentralization and democratization of information is inexorable due to the ongoing proliferation of the internet. But if century-old institutions like the LBMA silver fix are proving themselves to be unsustainable and superfluous in this brave new world, then what’s obsolete next? Only time will tell.