Overstock.com’s Daring Plan for a New Way to Trade Stocks

Trading stocks based on blockchain technology may seem like a radical idea, but not to Overstock.com chief executive Patrick Byrne. Byrne, who is an unabashed fan of the cryptocurrency and the algorithms behind it, has proposed an idea for a stock exchange where trades are made and settled using blockchain technology.

The idea for the exchange grew out of attempts to manipulate Overstock.com’s stock prices through naked short selling, a practice that allows traders to force stock prices down regardless of normal supply and demand patterns for the security.

“The beauty of the blockchain is that a Bitcoin can’t be double spent, because all the blockchain ledgers must agree to validate the transaction, otherwise the transaction is not entered in the blockchain,” says Judd Bagley, director of crypto initiatives for Salt lake City, Utah-based Overtock.com. “The blockchain can provide cradle-to-grave settlement, which can prevent naked short selling.”

Overstock, which is currently awaiting approval from the Securities and Exchange Commission to launch the exchange, plans to issue a series of its own digital securities to be traded on the new exchange separate from shares traded on the Nasdaq. The shares would be converted into digitized tokens, similar to a Bitcoin. Other companies that want to trade their shares on the exchange, which Overstock is calling t0.com, would need to do likewise. All digital shares listed on the exchange would be traded exclusively on it.

To enable trades, brokerage houses would connect to the exchange through an alternative trading system (ATS) of which Overstock.com is part owner. Traders could then access their account through the ATS to buy and sell securities listed on the exchange.

“We anticipate that the exchange will lend itself to companies in the pre-IPO stage,” Bagley says.

The exchange, which is being funded entirely by Overstock.com, will be blockchain-agnostic, meaning it will support securities digitized using the Bitcoin blockchain or those developed for alternative cryptocurrencies.

Overstock, which began accepting Bitcoin for purchases in 2013, says the digital currency accounts for two-tenths of one percent of its total transaction volume.

“Blockchain is a platform that can support numerous applications and a stock exchange is just one of them,” Bagley says.