The long road to Pinnacle: A history of trading

Decentralisation is bringing about one of the largest revolutions in the history of economics. We have seen the rise of decentralised currencies, decentralised exchanges, and decentralised organisations. Pinnacle and Brilliance involve all of these things and more.

Pinnacle will integrate the trading of all asset classes across all other major platforms into a single desktop or mobile app. The Pinnacle platform itself is a step beyond the recent wave of decentralised exchanges. It brings the best of both centralisation and decentralisation, and moves beyond the fragmented condition in which the trading world finds itself in the early decades of the twenty-first century. This marriage of centralization and decentralisation is what will enable our many unique features.

Pinnacle is the most radical complexification of the trading landscape to date. We refer to it as a “decentralised multiplex” rather than decentralised exchange. It will be the single hub through which all other brokerages and exchanges, whether centralised or decentralised, can interact. Pinnacle is the answer to the problem of exchange and brokerage separation which has existed for 6000 years.

Above: A representation of the Pinnacle multiplex, connecting the scattered stars of the trading galaxy. The Pinnacle multiplex will draw together all quality, trustworthy, centralised and decentralised platforms across all asset classes into a single application, while solving the problems of both.

In this quick history I will trace the evolution of trading from early commodity markets to the rise of paper trading of abstract assets like stocks and bonds, to international centralised exchanges, through to the digital revolution and the advent of computerised trading, to cryptocurrency, decentralization, and finally to the trading multiplex environment which our platform will birth. A quick summary of the evolutionary steps is given in the table:

Table 1: Some stages in the evolution of trading and brokerages from ancient times.

Ancient times

Commodities have always been exchanged between individuals, and physical commodities markets of a kind are as old as the human species. Anthropologists tell us of humans meeting to exchange wears since Palaeolithic times.

Simple futures markets date back over 4000 years to Mesopotamia, where livestock and grains contracts were traded, represented by clay beads marked with dates for delivery. Similar trading practices were seen at all major cities of the ancient world. These were the first physical exchanges.

Commodities have been bought and sold solely for profit as well as for utility for thousands of years. In his treatise Politics the Greek philosopher Aristotle recounts the story of Thales of Miletus, a mathematician who made a fortune through options trading in Olive presses in the 4th century BC.

Repetitive cycles of bull and bear markets in the price of wheat have been traced back over 2000 years through analysis of historical documents by the early 20th century trader and market commentator WD Gann.

Renaissance and modern era

Antwerp is generally recognised as the first modern stock and commodities exchange. The Amsterdam exchange is another famous early example. Products similar to modern futures contracts and options were traded. Traders could take the short side of the market as well as the long. This was the era of the most famous rapid bull market in futures contract history – the Dutch “tulip bubble” of the 1630s.

Modern candle stick charts were developed by Japanese rice traders in the 16th century, and have changed very little since then, only adopted as the default mode of Western charting relatively recently. Most of the well-known names for candle stick types and patterns date to this period, including the well-known “doji.” Other well-known Western chart patterns can also be traced to Japan: the “head and shoulders” pattern was known as the “three Buddhas” in Japan centuries before it became popular in the west.

Above: A head and shoulders formation on the General Electric stock chart. Like many chart features recognised in modern charting, the head and shoulders can be traced to 16th century China where it was known as the “three Buddhas” pattern.

By now trading had moved on from purely physical assets. Stocks and bonds were available and widely traded. Stocks are different to commodities as they are investments in the fortunes of companies. They are abstract entities. A company itself, as a legal entity, is something entirely abstract rather than physical. Likewise bonds involve the sale of the abstract notion of debt. This represented an evolution on the physical commodity exchanges of previous eras.

Stocks were also sold privately in coffee shops or at customers’ homes across the 1700s. The practice was often shady, and there were many reports of brokers simply printing additional shares to sell themselves, causing the devaluation and collapse of stock. (Modern regulation of stock and forex platforms has made investment a much safer activity than in previous ages.)

Above left: The Amsterdam Exchange in 1612. Above right: A grainy photograph of the trading floor of the New York Stock Exchange, prior to the age of computerised trading.

Wall Street

The New York Stock exchange opened in 1792 and London Stock Exchange in 1801. New York and London trading sessions continue to dominate across all asset classes to the present day.

The late 19th and early 20th centuries saw the rise of stock market indexes, which measured the average performance of a number of companies to reflect the overall condition of the economy. The Dow Jones Index came first, followed by the much larger S&P500. Many of the enduring theories of Western technical analysis including Charles Dow’s Dow Theory, Richard Wycoff’s Wycoff model, and Ralph Elliott’s Elliott Waves were produced in this period. The early 20th century was the heyday of bucket shops – backstreet outlets where gamblers would place bets on the short term movement of markets, which gained a reputation for dishonest dealings with customers, usually by misrepresenting the real price of the market to skew “bets” in their favour.

National currencies became increasingly pegged to the price of gold. By the late nineteenth century all major economic powers had pegged to gold. This made possible the emergence of foreign exchange currency markets. Price was determined by the difference of the price of an ounce of gold in one currency to the price in another. The gold standard began to break down during the First World War and was superseded in 1944 by the introduction of the dollar in place of gold as the global reserve currency.

Digitalisation

The IT revolution changed trading. The Nasdaq was the first entirely virtual stock exchange, in which all trades took place across computers rather than on a physical ledger. The market became truly global, with physical location no longer constraining buying and selling, and execution becoming much more rapid and reliable. The short term movements of markets became more volatile, as digital trading bots came to prominence a few decades later.

Digitalisation brought its own major bull market as the tech sector led global stock markets on an explosive rise around the turn of the millennium. As stock markets consolidated during the 2000s, metals and commodities made historic rises to all-time highs.

Above: The NASDAQ was the first completely digital exchange.

Retail forex platforms developed in the mid-1990s as a result of web-based technology developments, and brought leveraged forex trading to individual speculators. Previously the only option for individual investors had been spot trading between different foreign currency bank accounts. The retail forex industry has grown extremely popular in recent years, and this has led to unprecedented customer protection.

As long as trustworthy brokerages in regulated geographical areas are chosen – which include all of the best known forex platforms – funds are protected. Brokers are required to meet stringent standards of compliance. Deposits with many major brokers are insured by governments (up to a reasonable amount) in case of brokerage bankruptcy. Many leading brokerages also offer negative balance protection (again up to a reasonable amount – $50,000 in the case of FXCM),[1] preventing customers from losing more than they deposited in cases of extreme market moves, such as the Swiss Franc move in January 2015, which they are compelled to honour by regulators. Negative balance protection was demonstrably honoured by leading brokers during this event.[2]

A large number of rumours are spread on the web by disgruntled traders who have lost money in the markets, but in reality investment capital has never been safer than it is on large forex platforms in the twenty first century. Of course, if you trade badly, you can still lose money: but one of the wonderful benefits of centralised regulation is that you are less likely to lose as a result of dishonesty or unforeseen events than at any previous time in history.

Another noteworthy development has been the introduction of circuit breakers. These are digital mechanisms designed to prevent violent stock market collapses by terminating trading for a fixed period of time when markets begin to fall rapidly. This gives traders time to reassess and prevents “panic selling.” The 1929 “Wall Street crash,” by far the worst crash of the 20th century, saw the Dow Jones Index lose over four fifths of its value, and took 30 years to recover. Circuit breakers are designed to minimise the chances of a repeat.

A large stock market crash may have been avoided in 2015. Major exchanges were halted by circuit breakers, including the S&P500 for the first time in its history. On resumption of trading the market reversed direction on both occasions. Previous moves of this size had led to major depressions in the 1930s and the 1980s, but now the market merely consolidated for a few weeks before continuing its multi-year rise. The short term volatility of markets that computerised trading has brought is off-set by a more stable and reliable long term investment environment.

Decentralisation

Recent years have been noteworthy for the rise of cryptocurrency and generalised blockchain technology. This has produced a unique form of asset class that can be programmed to perform like a currency, a commodity, a licensing contract, or a share. Moreover, the algorithm of leading blockchains such as bitcoin makes them inherently inflationary, as the speed at which new blocks come into existence is cut in half at regular intervals. Not surprisingly, bitcoin has become one of the best performing investments in history: At the time of writing, bitcoin is trading at just under $6000 dollars a coin, and many mainstream market analysts believe there is much more to come.[3]

With every good idea in IT over the next decade likely to be decentralised, many believe we are at the beginning of a boom in decentralised assets that will impact global stock markets in a similar way to the tech boom around the turn of the millennium. At the time of writing (Nov 2017), the entire digital currency market cap is currently only 5 percent of the more than $4 trillion inflation-adjusted value of stocks during the tech boom. The amount of money being invested in ICOs can only help blockchain based innovation cement its growing significance as a steady stream of high quality blockchain solutions flows out in the coming months and years.

Above: The advent of blockchain technology was the most significant step forward for the financial world in many years. Decentralised currencies were quickly followed by the pioneering of decentralised exchanges themselves.

Cryptocurrencies have many advantages over ordinary money. They are beyond the control of governments. In fact they are controlled by the community of users, who can effectively vote in or out major changes based on where they point their mining power. They are thoroughly democratic. They also offer an unalterable record of financial transactions, which cannot be edited or withheld by centralised sources. They have the potential to make every financial transaction visible, and accountable, in a way that would force unethical factions in politics, law, business, and everywhere else, to transform. Many have argued that they will become the backbone of a fairer economic society.

Decentralised assets have brought with them the possibility of decentralised exchanges – platforms on which users can exchange assets without having to trust a centralised platform at all. A proliferation of such platforms have been pioneered, including Bitshares, Binance, Waves and many others. The price of these coins/tokens has often skyrocketed. They represent a genuine evolution of previous exchange protocols and are an exciting area of innovation.

Decentralised exchanges are potentially revolutionary in that they offer more secure storage of funds. Historically this was important in crypto, where exchange collapse has proved problematic, along with hacks.

Decentralised exchanges have also faced many challenges. They have been beset with liquidity problems due to lack of users. On some platforms user’s orders disappear when they are not online. They also offer only the most basic of investment instruments. A more serious problem lies in the fact that decentralised exchanges are arguably becoming obsolete before they have even really caught on. From the beginning, they solved what is merely a historical rather than current problem in the wider worlds of forex, futures, and stock trading: stringent regulation of the large brokerages and exchanges in Europe and America has meant that client funds have never been more secure. In the crypto world this regulation has begun. All cryptocurrency held on Coinbase, for example, is insured. Insurers will pay out to reimburse users in case of a security breach.[4]

The opportunity to trade all large cap coins or tokens on a regulated exchange may not be far away, but decentralised exchanges will continue to play a valuable role in providing more secure environments to trade the smaller cap coins and tokens that are not available on insured platforms. If they can attract more volume, they will also play a function for well capitalised traders whose deposits exceed the $250,000 insurance limits of sites like Coinbase.

The multiplex vision

Pinnacle will take advantage of blockchain levels of security, and the ability of blockchain networks – specifically the Brilliance token on the Stellar network – to transcend international boundaries without regulatory hindrance, and integrate all major centralised and decentralised exchanges.

Pinnacle will be a marriage of centralisation and decentralisation. We will make use of centralised computation where it is superior to decentralised, and  we will utilise the unique benefits of decentralisation where it offers solutions to problems which have never previously been possible.

Pinnacle will unify every popular and quality platform across all asset classes, providing a single application for every trading need. We will transcend any individual exchange, whether centralised or decentralised, by integrating all disparate pieces of the trading world into a complete picture for the first time.

Above: In marrying together the best of centralisation and decentralisation, Pinnacle will transcend the limits of both.

The Pinnacle multiplex will integrate not only all current platforms, but the advantages of all previous trading ages. We will bring the security of the regulation of major brokerages and the choice of the huge range of products they offer, but we will administer access to that security through the unhindered world of decentralisation. Your own security, when you rely on our platform, will be handled through the blockchain. Traders and copy traders will have access to the widest range of trading options in history. In the future, integration with selected Stellar anchors which have passed our assessment standard, will bring the possibility of users trading physical assets through Pinnacle (everything from gold and silver to clothing and coconut oi), in a modern echo of the ancient commodities trade. The best of every trading age will be present at once. Pinnacle will, quite simply, fulfill your every trading need.

Notes

[1] http://www.dailyforex.com/forex-figures/forex-brokers-2/fxcm-uk-caps-negative-balances/1928

[2] http://blog.fxpro.co.uk/fxpro-articles/12022015-forex-magnates-interview-with-mr-psimolophitis-after-the-snb-crisis/

[3] https://www.cnbc.com/2017/07/07/strategist-tom-lee-weighs-sees-bitcoin-going-as-high-as-55000.html

[4] https://support.coinbase.com/customer/portal/articles/1662379-how-is-coinbase-insured-

Copy trading: The smart way to grow your money
Verification of trading records