The Secondary ATS
Dr. Kiran Garimella
Chief Scientist & CTO
Dr. Kiran Garimella
Chief Scientist & CTO
Kiran Garimella, Ph.D., is the chief scientist and chief technology officer at KoreConX, leading the strategy and development of blockchain and machine learning solutions. A sought after speaker and author, Kiran has more than 25 years experience in information technology, consulting and financial services. Previously, Kiran held roles such as global CIO and chief architect at a General Electric company and vice president and chief evangelist for BPM at Software AG. He is also an advisor to the Alliance of Merger & Acquisition Advisors and the MidMarket Alliance, principal founder of iKnowCentral and co-founder of CognitiveWorld.com.
Head of Market Structure
Head of Market Structure
Lee Saba brings more than 20 years of experience in the financial services industry. Prior to joining Rialto as Head of Market Structure, Lee was Managing Director and Principal at Wellington Management where he was responsible for proprietary and third party multi-asset electronic trading and connectivity infrastructure. For over 17 years, Lee led and contributed to industry standards on a variety of concepts including FIX post-trade for equities, futures and FX, execution venue normalization, risk mitigation symbology and electronic trading risk controls. While at Wellington, Lee headed the inaugural IT FinTech Working Group and was a vocal advocate of the investor hub for blockchain and digital assets research. Lee currently serves as the co-chair for the FIX Trading Community (https://www.fixtrading.org) consisting of 290+ members worldwide and is also an active steering committee member for Northeastern University’s D’Amore-McKim School of Business FinTech Initiative.
Dr. Kiran Garimella 00:27
Hey, how are you doing?
Lee Saba 00:32
Excellent Kiran. Good to see you again.
Dr. Kiran Garimella 00:35
Yeah, good to see you too. Wonderful. So this is an exciting space to be in franchising, isn’t it?
Lee Saba 00:44
It certainly is. Yeah, I would, I would highly agree from what I’ve heard from some of the earlier panels, for sure.
Dr. Kiran Garimella 00:52
Absolutely. So several years ago, you know, when I was big in corporate America, and, you know, I got approached by, you know, so many franchises saying, Hey, would you like to consider an alternative? Because, you know, people in our age bracket, you know, age group, and maybe station in life, you know. We are sort of the target for a lot of the franchising business opportunities. And it’s amazing that there’s an entire ecosystem. And I still remember that, you know, I looked at several businesses, you know, propositions like that. And, you know, the one thing that kind of stopped me, I was saying, you know, we’re gonna get the money from, right. And that seemed to be the biggest roadblock to many of these things. And some of these things were like, you know, multimillion-dollar, you know, these very good franchises, by the way, just about all of them are, and it seemed to be a very, you know, difficult thing to get into. I don’t know if you’ve had that experience from your side.
Lee Saba 01:50
Yeah, no, for sure. I mean, you know, there are certainly a lot of franchising opportunities out there. And I agree, I think I think sometimes you wonder, I mean, I’m clearly not as old as you. I’m 22. So, you know, I probably haven’t been approached as much as you know, I have actually inquired about that, you know, many times over the years. And, yeah, it’s a, it’s a very good opportunity said, but raising the capital to actually get into that position to launch certain things is maybe a question mark, at least it was, I know, in the early 2000s and 90s, when, when I was caught into my numbers, just born, but But now, but no, I understand for sure. But it’s, it’s a challenge here. Yeah.
Dr. Kiran Garimella 02:45
So, you know, and this is why this whole panel today, this section is so timely, on franchising, I mean, this is one of those markets where an order, it’s not a bunch of ecosystems out there, that it’s very dynamic. And what I’m seeing now is that there are a lot of younger people out there that, you know, they want to get into the business themselves, and I think they’re kind of looking for similar opportunities like that. So, you know, the one thought that I have, and, you know, we are at the tail end of this entire, you know, core summit and session. So, I want to bring it into a little bit of focus in terms of the secondary markets. So if you think about the primary raise being made. You know, raising capital to get into a franchise, AND, and OR set something up like that. And, of course, on the tail end of it, there is this whole idea about the investors and franchises to exit at some point in time, or look for a liquidity event. In the center world, I mean, you know, how do you see this thing playing out? I mean, you have the primary raise, and then you have the secondary, which is a trade. And it said, which one is a dog? And which one is the tail? Who’s wagging home?
Lee Saba 03:59
Yeah, I mean, you know, I think it’s the beauty of the new regulations are relatively new regulations, right. That that allow for, for, you know, franchisees to you know, work, you know, actually have a regulated security behind them for what they’re investing in. And, you know, Reg A and Reg CF, I’m sure you guys covered quite a bit of that today. You know, allow for that, that that regulated mechanism, you know, where you actually have a true security that’s been, you know, blessed for lack of a better term by the SEC. And, you know, it’s something that’s, you know, can have true ownership, and it can also have true transfer of ownership. I think that’s where we get into the secondary training, right? It’s, you know before you know, it’s fantastic that we have these new mechanisms to that allow crowdfunding you know, to participate side by side with an institution. You know, investors, and having the opportunity to get access to some of these, you know, latest and greatest things, but you know, where we’re drifting is that now that you actually have access, and you have, you know, the next greatest security, you know, in your mind, if you want to buy more, or you want to sell your current position, then you’ve got the ability to do it in a regulated fashion, which is where, you know, Rialto Markets comes in and obviously working with KoreConX, and, you know, in making sure that that becomes a quite a fluid process.
Dr. Kiran Garimella 05:37
Yeah, no, of course. So, so Lee, I mean, you and I, we have spoken about this, you know, the last couple of years on, you know, how to structure and bring the technology infrastructure to all of this and in what some challenges might be. What is your view of, you know, when investors look into these markets, many of them and as you and I, we both known for being in the space, our results? We kind of come from the public markets, and any investment in the public markets is generally relatively liquid, especially the higher capitalized stocks, right. And when you think about, you know, we come here with that mindset investors come to these private markets with that mindset of, you know, instant liquidity, and, you know, it’s a public market fast-moving, and so on. What is your opinion about the secondary markets? Because we know, we’re not quite there yet. What are you hearing from investors in terms of how they view the relative lack of liquidity in these private markets?
Lee Saba 06:48
Yeah, it’s a great question. And a great thing to understand. You know, private markets, you know, are, or can be illiquid, right. And it depends on, you know, the amount of shareholders that you have, in actuality, whether or not you’re accessing a, you know, an ATS or an alternative trading system that’s recognized by the regulators. But, you know, even in the public markets, and I think, you know, people might misunderstand this, you know, if, you know, trading Amazon, and IBM and Apple and Microsoft, I mean, yeah, those are as liquid as water, right? I mean, the all-day long get quotes and very, you know, the, you know, very close prices, price prices on those. But there are stocks in NASDAQ and New York that never trade, and they’re paying the full-blown, you know, listing price, you know, they pay an average of a million dollars a year just to maintain their status on those exchanges. And that’s, that’s the lower end of the price scale, to maintain that. So, you know, when you think about, you know, liquidity in, you know, you and I’ve had these chats before. I think about it more as fluidity, and, and we are flattening the rails, we’re making this a little bit more seamless, because if you were, you know, without a secondary market, and, you know, working with the transfer agent, and, you know, like yourselves to transact a private security. You had to go out and find the other side, maybe contact the issuer, maybe the issuer can make a few phone calls or contact their legal, and then you know, a bunch of paperwork would come over. Somebody would have to sign it and review it, you’d get a package and, you know, you’re talking days, at best, you know, weeks to months, more likely. And, you know, what’s the price what’s the, you know, now, you know, we, you know, working closely with you guys, we can, you know, put put the, you know, the security up on our ATS. As long as the issuer allows for that in sync, you know, the cap table to the ATS, so that anybody who comes in and wants to, you know, buy some or sell their current position, we can easily check to make sure that they have the shares that they’re trying to sell. And in the buyer, we make sure that they actually have the cash to support the trade that they’re trying to do. Once those two criteria is met, we can match as long as the limit prices are met and everything else is in range. And then we notify, you know, the shareholder, the new shareholders and the new cash holders. And obviously, the transfer agent at KoreConX about what had just transpired. That can happen within minutes, as opposed to days weeks, and it’s all you know, in a regulated fashion. So, you know, I think the other point I’d like to make is you have to really consider how many shareholders you actually have. If you have 100 shareholders, the liquidity is not going to be fantastic, but you’re going to have, you know, the ability to still transact in a more fluid way. If you have 100,000 shareholders, your likelihood of finding somebody else that’s willing to buy your shares or sell their existing shares is much higher. So you just have to keep perspective, you know, every company that goes through a Reg CF or Reg A is going to have a different liquidity profile, you know, around, you know, what it is they’re trying to do.
Dr. Kiran Garimella 10:42
But isn’t there a larger liquidity profile out there, so, you know, you might have one company with 500 shareholders, and you might have another one with 1000, you might have a third one with 100,000, and so on. But the essence of liquidity isn’t just simply the number of shareholders in each company specifically, but it’s more about the total number of private market shareholders are there. So you know, if you add them all up, it just makes mind-boggling it just kind of keeps growing, doesn’t it?
Lee Saba 11:12
Yeah, I mean, there’s definitely a networking effect. That, again, you know, the more issuers you get, that are, that want to do the secondary trading, it allows for, but you said. If there’s 10, issuers on there, and one has 5001, as 10,000, as 50,000, all, you know, all 80,000 of those participants are now able to cross-pollinate at any time, you know. Across all of them, because we’ve already run AML and KYC, for all those, those participants, and more likely than not, they’ve already been processed with, you know, the payment rails as well. So it really does, you know, create this, this bigger, open, wider network effect for transacting. You know, in some, some folks, you know, like that some, some issues like that, others might want to keep it a little bit closer, you know, to the existing shareholders. But it either model works, and, you know, it’s an exciting time, because I don’t think people, I think people are actually just starting to figure out that these private markets are accessible to them, and that they make trade similar to, you know, the process, the plumbing underneath the hood is a little bit different than traditional, you know, listed equity markets, but the look and feel would be very similar, you know, to how you would process a trade, whether you’re at, you know, Vanguard or, you know, fidelity.com, or something like that E-trade, it would be a similar experience, that you would bet you would feel.
Dr. Kiran Garimella 13:00
Absolutely. And I think it’s important for, you know, people to understand the mechanics of how a secondary trade could potentially be put on, because people have come to this type of markets with a certain expectation of how these trades are being carried out. So if we take the path of the sacking of a prime minister raise, and after, you know, the primary raise is closed, they become the official shareholders of a company. And once they go in into the platforms, and kind of look at that, and say, Hey, here’s my holding, I want to trade that, basically, it’s going to be very simple, hit the trade button, right, you’re going to hit the trade button, from that point on a series of things actually happen. And I think it’s important for us to kind of walk through a little bit of that and point out where some of the issues could be and where many of the protections are built into this process. So the moment that trade is hit, there are a number of activities that are kicked off on these our infrastructure platforms here that we’re talking about here. Right. And it’s all about ensuring that you know, the positions are held, you know, free and clear to trade, there are no liens against it. There are you know, all these rights and things to look for. And then what happens is basically that is then a seamless, I like, I love the word fluid, like the way you mentioned. So it’s a very fluid handoff into what I think is the secondary markets, right? And then you know, then the matching happens on your side as well. So, once all of that is done, and the matching is a there’s a Counterparty buyer or a seller that’s come and the ATS entity, which is we all to yourself, you know, you know, fettered all that and then it comes back into getting that new shareholder the counterpart already getting onboarded onto the platform and onto the cap table of the issuer that I think is generally the broad process, in that, you know, did I miss anything there? Or is it pretty much it?
Lee Saba 15:15
No, I think I think you hit it. You know, just, again, if you’re an existing shareholder, you know, after a primary raise is, is, is finalized, you know, you now have the ability to, you know, put those in the market, should the issuer decide to want to allow the trading. And, you know, again, it’s that fluid, you know, ease of ownership transfer, that I think, you know, we’re really facilitating here, we’re kind of like a messaging hub, in a way, you know, we do a regulated match, you know, matching buyers and sellers communicate out that, you know, something, you know, official just took place. We notify, you know, you as the transfer agent in good control location. And, and that’s a good thing to understand, right, is that you’re the transfer agent, the registered transfer agent is also an SEC-registered entity. And, you know, when they’re doing the cap table management, you’re gonna sure that they’re checking all of the things that need to happen when you said that they’re free and unencumbered, there’s no liens, if there’s new, something going on with those shares, for whatever reason. And by the time they get to the ATS, they are already there cleaned and ready to go. Both position in the shares position. Once we do the match, again, we just notify the bank and we notify, you know, Casey x in this in this example, and we update the one, the one thing that we were talking about a little bit earlier was, you know, if there’s somebody that’s not existing on your cap table, already, it’s a purchaser that you’re unaware of within the issuers cap table, you know, you and I have painstakingly gone through this under a microscope and, and really devised a great way to interact, you know, Rialto is obviously a registered broker-dealer with the SEC and FINRA, so you know, we can run AML and KYC. And, and pass that information over to you that Jose, you know, like me, like Karin you know, he just purchased 5000 shares of ABC Corp, please enter him in him into the cap table with this position at this price, and so on, and so forth. And then we’ve got a great mechanism using, obviously, the backbone of your technology, which is the hyper ledger instance, you know, we both now run Hyperledger instances to do our communication. And as well as some of the database layer, which is another layer of security in a way because of the permissioned nature within the blockchain realm. So, you know, it’s a pretty tight-buttoned-up system. And, you know, if you get a match, we’re trying to assure settlement. I’m so we actually pre-clear both sides of that trade. So, you know, there’s never going to be a trade fair. And that’s, you know, that’s, that’s pretty much it in a nutshell. Once trade happens, you know, behind the scenes, you just get notified that you did a transaction, you know, you can see it live in the order book. And then, you know, Khurana nice systems takeover.
Dr. Kiran Garimella 18:39
Yeah, it’s, you know, what’s amazing, and I think we actually went through this process, once we sit down here, let’s consider a very, very simple, so-called the simplest possible trade between John and Mary, two people, right, just two people. And we kind of went through this list of, you know, all the different checks and balances that we have to look for. And we came up with a total of 25, if you remember, there are like, 25 different things that we had to check just to make sure everything is fine, right. And, you know, what’s amazing about this infrastructure is that it’s already there. It’s not like we’re building this now. It’s there, we have conducted trades, you know, and it’s like, that quick. And one of the most important things, you know, that I think, you know, we should cover or describe is that there are three or four major things that this entire process is built on, it’s built on certain principles of trust. And I have to think about, you know, people who come to this sort of markets from the public markets where it seems like you know, it’s a peer to peer transaction, you know, it’s a Bitcoin kind of thing. It’s a peer-to-peer transaction when things go wrong. That’s when they you know, help. Okay, that’s a problem.
Lee Saba 19:58
Yeah, I mean, We started, there’s recourse. Again, we’re talking about regulated instruments here, you know, the SEC is looking out for the investor community in this process, and that’s why they make us, you know, validate ourselves. And, you know, in hit the high bar to become a regulated entity. Yeah, no, I think, again, we’re trying to make this as smooth as possible, even though we’re designing a new market structure under the hood. But to the, you know, to the layperson, or, you know, as my mom would say, you know, as a trotting horse you wouldn’t know. You know, passed by it and not even realize, you know, how complicated it might be underneath. And even the stuff that happens, you know, let’s call it E-trade or something, right? I mean, a lot of movement underneath there, that, you know, they make it look simple, but it’s not, and, you know, we’re doing something similar underneath it, but it’s actually focus for private markets and focus for the regulatory status of private markets. And, you know, they don’t; they don’t have a central clearing model. And some folks on the on the webinar might know, about, you know, central clearing, and, you know, the DTCC the Depository Trust and Clearing Corp, were all US trades, you know, for the, you know, listed stocks have to pass through. You know, we have the ability to bypass that we don’t need to do that. Because of you know, ta status registered TAs, you know, in the private placement, you know, connotations. So, it’s, it’s a really, it’s a really exciting time, you know, for these folks. And, you know, in some, I’ve heard some folks mentioned, you know, it’s the private markets or the new public markets. And, you know, that’s it, it’s somewhere ways, you know, I can see how they, they get to that conclusion.
Dr. Kiran Garimella 22:11
Yeah, and we’ve been tracking the evolution of the public markets versus the private markets. And, you know, the statistics show that the influence and the growth of public markets is going to still be growing, but not at the pace that it was before, right. And now, the private markets are, like, you know, just taking all the growth rate is high. In fact, in the last couple of years, we had anywhere between, you know, what I believe, like, 1.2 trillion in the public markets, but 2.9 and the private. So you’re right, I mean, the private is the new public, it’s the new norm.
Lee Saba 22:48
Oh, for sure. I mean, you know, when you look at the statistics, you know, for private companies, just in the United States alone, it’s somewhere that again, these are kind of vague numbers, but somewhere between, like, 26, in 30 million US private companies in the United States, if you look at the listed companies across, you know, New York and NASDAQ, I think it’s under 4000. So you have a wide berth of votes to choose from, and think about, especially if you’re deep in that industry, or you have a good feeling about that. That company or entity, and there’s also loyalty, you know, that is, that is, loyalty, or just familiarity, you know, with with the company, that, you know, if you frequent that. That shop, or that company, you and you buy their products, and now you can be an owner, as well, in the success of that you’re like this is this thing’s gonna go to the moon, I know it like this, I don’t know, I’m gonna make it up, you know, this hamburger that they make is just off the charts, it’s the best thing I’ve ever had, I want I know that this is going to take off. And now there’s this, this ability to participate in the primary market. But you know, what I can also if I didn’t get is not enough in the primary, I can now buy some more in the secondary market, or I can sell my current position. You know, maybe at a higher price, and then, you know, come back, or maybe I sell a piece of my position because I had a life-changing event. And I think the other thing, too, is, I don’t know if we’ve spoken about it again, I wasn’t able to dial into it all day, but is the employee stock option plans as well? That’s right, you know, private companies now, companies are staying private longer. And the fact that they’re staying private longer means that, you know, you might get paid in stock and you can’t realize any you know, on paper, you might have some money in the, you know, theoretically, but there was no way to realize that money. Now, we’ve got this fluid process that allows you to trade In and out of that employees we found, are very responsive to this because, you know, they don’t have to have a 10 or 12 or 15, or never exit. They can have, you know, okay, you know, we did to see if we wait the year it goes, if we did a Reg A, you know, we wait, you know, as soon as the raise is done, and, you know, if the company allows it, we can happen. So, it’s, it’s gotten a lot of great, great response from that perspective.
Dr. Kiran Garimella 25:29
Yeah, you know, you know, I can tell you how much you ever worked on this one, we’ve spoken to so many different constituents in the private capital markets. And it is amazing how much we have done. And, you know, people listening in on this, you know, should really realize that none of this is fiction, it is not a pilot, it is not a POC, the rails are there, they can be run new, you know, real engines, hot days, real traffic on this, it’s all there. And that is real exciting part, there’s a swell, you know, an undercurrent of private markets and private investors that are just simply coming on board and coming on board and coming on board. And we see this, you and I, and some of our other speakers here. And our core partners, you know, we see this all the time. And we have to wonder, wow, we are so thankful, I think, to be part of this ecosystem to be partners. And, you know, to move this entire revolution forward. So, Lee, we’re having a lot of fun, and much, much more to come. So thanks to you, and thanks to all of our other speakers for enlightening and educating what is actually possible in these private markets, especially in this franchising space. And, you know, we will have many, many exciting times. And so, we will see. I mean, we’ll have a lot more core summits coming up in the future. But this is an exciting space to be in. Once again, thanks, Lee, for your participation. And, as always, it’s very enlightening and exciting to talk to you and these other participants on the on these KoreSummits. Thank you very much.
Lee Saba 27:16
Thank you Kiran and thank you KoreConX. It’s great.
Dr. Kiran Garimella 27:20
Thank you all bye for now.