A HIGHER CALLING
Clad in an all-black ensemble with an additional accoutrement of a black flat cap, Tony Weerasinghe graced the stage in a much-longed-for appearance in a recent crowd-filled startup conference. He was to present the story of his next big project. “I used to help large companies and exchanges make money,” says Weerasinghe who founded MillenniumIT, a company that specializes in developing trading technologies for global stock exchanges. In 2009, MillenniumIT was acquired for $30 million by the London Stock Exchange and became one of Sri Lanka’s high profile tech acquisitions to-date. “And suddenly I realised that I’m just helping the rich get richer.”
In January last year, after a period of hibernation post leaving the executive board of the London Stock Exchange in 2013, Weerasinghe launched Ustocktrade, a dedicated alternative trading system (ATS) for small time retail investors. The product was initially targeted at US college students as a secondary funding scheme to pay off student debt. By the end of six months, the platform became the sixth largest for tier 2 securities (stocks which are not included in S&P 500 Index and Russell 1000 index) alongside major ATS’s of Deutsche Bank and Merrill Lynch.
ATSs are often referred to colloquially as dark pools – exclusive private exchanges that are veiled from the investing public. The allure of ATS lies in its covert nature. This allows institutional investors with huge investment portfolios to take or dispose large orders without suffering adverse price movements on a trade. Thereby, ATSs have become sanctums of the rich and a mecca for high frequency traders.
Weerasinghes intention is to destabilize this hegemony to achieve a vision of democratizing the wealth produced by exchanges. Even in traditional retail trading, institutional trading firms have intrinsically leveraged to take advantage of better technology, automation and by fostering closer links with exchanges. In the age of high-frequency trading, these firms can react to market events in milliseconds to achieve the most optimal trade. But small retail investors are often plagued with lack of real-time price information. When an order is placed, the transaction follows multiple touchpoints: from the display screen of a mobile phone of the trader, to the broker, to finally arrive at the exchange. “High-net-worth firms would already be ahead when the small retail investor makes an order to buy a stock. By this time, the price has already moved up,” he says. “So, the retail investor always gets played out in the end.”
To make exchanges more accessible beyond the traditional capital market participants at Ustocktrade, there is no minimum deposit to register for an account. Registered users can buy and sell United States-listed stocks and exchange-traded funds from anywhere in the world. For each trade conducted, a user is charged $1, plus a monthly subscription fee of $1 for using the service.
“We are an exchange, not a broker,” reiterates Weerasinghe. Ustocktrade trade shares faster by eliminating the expense involved in passing orders from one user to another like an online brokerage firm. However, when there is a counterparty risk – meaning an event where there are no Ustocktrade members to fulfill an order – a special agent called a ‘super user’ steps in to complete the trade to ensure liquidity within the network. “This is a first in the world,” he says. The super user borrows the idea of a market maker – the entity that holds the shares of a particular security to facilitate a trade to assure liquidity in the market. In the case of Ustocktrade, currently, Weerasinghe himself acts as the super user.
Ustocktrade’s most crucial feature is its zero-day settlement promise. For years, zero-day settlement in trading remained an illusory feat. In the conventional way, buying and selling stocks was initially communicated through a brokering agency, which then places the order at a stock exchange. While the trade is recorded on the same day, the delivery of the stock and the settlement of the funds can take two or three business days, depending on the exchange. “With the current volatility in the world, so many things can happen in three days. If you buy a stock and wait for three days, there is a risk of it dropping,” he says.
“That is the million-dollar question everyone is asking,” quips Weerasinghe when inquired on how he veered though the stringent bureaucratic maze to obtain the ATS license from the United States Securities and Exchange Commission. When he applied for the license, it was the first ATS dedicated to the retail investor.
Taking this fact into account, he made the case that an easy-to-use trading tool like Ustocktrade could bring in a new generation into investing in stocks at a time when only half of Americans owned stocks, a record low as revealed by a 2016 Gallup survey. For the regulators, this would have been an enticing proposition, but that alone would not have been convincing enough to garner their trust to issue a license. Next, he pulled out the biggest trump card he had, himself. “They knew who I was and all the things I’ve done,” he says. “That reputation also probably helped.”
Weerasinghe exemplifies the qualities of an artisan watchmaker when it comes to understanding the inner workings of a stock exchange. As in a complex universe of a watch where each turn of a cog interacts with every faint rumbling of the springs, Weerasinghe is sentient to the dynamics of exchanges. “There is lot of things that go into it. Trading is the easy side,” he says.
In all trading platforms, it is the backend where all the grunt and crucial work occurs: from the clearing and settlement, depository and portfolio management to ensuring fluidity in online payments. This requires highly competent technical expertise and hard wrought know-how of the nuances in the functioning of an exchange. “You have to understand it from all angles,” explains Weerasinghe. “We had to create the whole ecosystem because we do the whole lifecycle of a trade.”
With Ustocktrade expanding its user base exponentially and rapidly inching towards a milestone transaction volume of over $1 billion, Wall Street onlookers raised alarms in purview of the unusual success of the company. By August 2016, just seven months after its launch, the US Securities and Exchange Commission ordered an internal audit investigation of Ustocktrade after 40 letters of protest were issued against the company. “At that time, my Boston office only housed eight people and I had 20 regulators to conduct their investigations for three months,” says Weerasinghe with a grin on his face. “So, I had to buy additional office space for them to settle in.”
The company did not halt its operations, but was asked to stop its signature offering, the zero-day settlement feature. This had an impact on the company’s loyal user base. Ustocktrade members expressed their displeasure in stock and investment forums on sites like Reddit, threatening to leave the platform for its rivals. “Those eight months were painstaking. We didn’t progress much.”
Weerasinghe says he anticipated a sudden outcry from Wall Street given the scale of the success and the newness of the product. By May 2017, Ustocktrade was cleared of any violations by the regulators. The whole ordeal turned out to be a blessing, he believes. “When you disrupt an industry, the regulator has to inform the public that everything is legit here. It worked well for us looking back,” he says.
Ustocktrade’s origins are not found in a superstar fintech entrepreneur’s megalomaniacal impulse to strike the next big jackpot again and again, but is based on a more altruistic motivation. “We started a charity first and then started a company to help that charity,” says Weerasinghe. “It’s not the other way around.” The profits from Ustocktrade will fund Weerasinghe and his wife’s charity, The Cainan Foundation, which aims to build boarding schools for children from disadvantaged communities.
Weerasinghe has always had a natural tendency towards societal good from a young age, especially after seeing his mother working three jobs to put him through school. He is not afraid that the overbearing philanthropic motive would deter the competitive drive or financial potential of the company. After its shining performance, the company was offered to be bought by four investment banks, only to be declined by Weerasinghe.
Even though Ustocktrade expands to large markets like India and China in the ensuing months, Weerasinghe strives to make his team as agile as possible to keep the cost low. “Every country we enter will run with five to eight people. We will do a billion dollars with 12 people. That’s our model” he says. “Our goal is lean and mean, and to help people make the money.”