tZERO is a capital markets platform and regulated venue for the secondary trading of security tokens.
tZERO first emerged as a subsidiary of online retailer Overstock, through Overstock’s blockchain investment arm Medici Ventures, and was initially led by longtime blockchain proponent and Overstock CEO Patrick Byrne. Medici owns 80% of tZERO. Overstock conducted the first SEC-registered offering of digital securities using blockchain technology, trading Overstock Series A Preferred Stock in 2016 through an earlier version of the tZERO platform. The TZROP token is a self-avowed security token representing equity in the tZERO platform, and uses the ERC-20 standard. tZERO closed a security token offering of TZROP in August 2018, raising only from accredited investors, that was announced as $134 million. The platform launched in January 2019, allowing accredited investors to trade TZROP; initial trade volumes were ~$200k/day, with the expectation that volume would increase with the introduction of additional tokens and in particular retail investor access in August 2019. Over the long run, tZERO aims to be a unified capital marketplace for both tokenized versions of existing securities and novel security tokens, potentially making it a key piece of the emerging security token infrastructure stack.
A second business line for tZERO, beyond the trading of security tokens, is directly related to a tZERO’s goal of improving existing securities markets’ functionality. In the tZERO team’s view, a significant and long-standing disfunction of Wall Street as it currently operates is the naked shorting of securities, an issue which is both systemic and also a personal one for Bryne and the Overstock team given Byrne & Overstock’s related experiences. In brief, naked short selling primarily occurs when a trader shorts a security without first borrowing it from a broker-dealer. It can also occur when a broker-dealer who is authorized to lend a security actually ‘lends’ the security to multiple clients (in exchange for a small fee), each of whom considers itself legally entitled to short the security in question. Either instance creates a possibility of market manipulation by insiders and/or market failure if the trader cannot deliver the requisite shares. The SEC took steps to ban ‘abusive naked short selling’ in 2008, but the practice is not technically illegal.
tZERO intends to use a system of Digital Locate Receipts (DLRs) to track the ownership of all securities on the platform. If a trader cannot produce a DLR proving that they have borrowed or own the requisite shares, they cannot short that security, but the system equally ensures against a security being lent multiple times. These receipts will be stored on the FLO blockchain, which specializes in storing meta-data of digital media on-chain through the Open Index Protocol. For each transaction on the tZERO platform, FLO tokens are spent to store data of the security receipt (which includes the broker who owns the security). By creating a unified record of ownership for all securities traded on the platform, tZERO aims to address an inefficiency and potential risk factor existent in other capital markets.
The full tZERO platform consists of order entry, management, and routing systems, a regulated Alternative Trading System (ATS), and a clearing/settlement system with optional ledger agnostic blockchain functionality. In the multi-year development process of tZERO, tZERO acquired FINRA-regulated agency brokerage firm SpeedRoute and registered broker-dealer Pro Securities. The initial marketplace is maintained by broker-dealer Dinosaur Financial Group, with additional entities to be added to increase liquidity and market coverage. The front end trading systems aim to accommodate both professional and retail traders. The platform also uses a Smart Order Router system to dynamically route order preferences based on current market prices and historical trends, as well as splitting individual orders across multiple external markets. tZERO utilizes the Blue Ocean platform to provide overnight trading for US equities.