Results of Demonstration Run
How to Succeed in Stock Swaps
There is no reason to dwell on financial motivations for stock swaps. If the motivations were strong enough, the stock swap market would exist! For the purpose of demonstrating BEDM, we are content to adopt the view that buyers and sellers will evaluate their profit and loss based on the cash equivalent of the two exchanges. For example, if the stock you held during the swap goes down and the stock you lent during the swap goes up, then you have profited on paper when the swap is completed and you receive the appreciated stock in return for the depreciated stock.
Whether that gain is real depends on whether you simply hold stocks or actively trade them. If an active trader correctly anticipates the market movement, that trader can swap a rising stock for a declining one, then immediately sell the stock received and reinvest in some third stock that is rising. Then just before the swap transaction completes, the trader sells the appreciated third type of stock for cash and buys back the stock needed to complete the swap at the low, depreciated price. If the trader can pull this off, he can profit from the smart use of the money during the period of the swap and his original stock will be coming back in any case.
In short, you can succeed in stock swaps if you can predict the stock market! Let’s leave that topic for the experts and say that we regard our example of stock swap trading is a kind of game. We score the game by the net changes in the cash value of the stocks and the incentive fees that the two parties exchange. BEDM lets players operate the game in complete privacy without exposing their playing methods.
The Request to buy a swap
In any real market, many people are looking to buy and many to sell. In this demonstration, we’ve simplified matters. There are 4 players, A, B, C and D, who are offering to sell swaps but only Player A is looking to buy a swap at this time and there is only one swap that Player A wants - a swap of Disney for IBM stock. Every player has some flexibility on price. However, it is bad negotiating practice to state up front just what range you can accept. Furthermore, players don’t really want other companies to know too much about their business. Ideally, no one should know that Player A wants to swap Disney except the player that agrees to the swap. Thus, the players keep their negotiating parameters under strict lock and key. In the demo, we offer the “god’s eye view”. We can look at all the players hands without any security impediment.
So let’s look at what Player A wants:
ask:
have: DIS
want: IBM
shares: 10000
cash_per_share: [ 0.0000, 3.4100]
interval: 12
ref_id: 12345
end
This is a formal request by Player A to buy a stock swap that exchanges Disney stock for IBM stock for a period of 12 months. The buyer offers 10000 shares of Disney for the a certain number of IBM shares to be determined by the relative prices of Disney and IBM stock at the opening of the stock exchange. In addition, the buyer offers to pay as much as $3.41 per share ($30,410) to the seller who accepts the Disney stock in exchange for IBM. Obviously, the buyer would prefer to pay less, ideally nothing! Player A wouldn’t want to start by showing a willingness to pay that much up front. However, in this case, the negotiation is carried out by exchanging encrypted documents with a broker who cannot read the documents. Consequently, Player A can write down their company’s negotiation position including the flexibility on price and still be confident that neither the Broker nor the opposite players knows the exact terms of the position.
Let’s jump ahead and see what the eventual negotiated agreement looks like. In this example, the outcome is that the Broker finds that there is a match between Player A as seller and Player B as buyer and the mutually acceptable terms of the swap agreement are:
agreement:
shares: 10000.0
swap: DIS
for: IBM
plus: 1.705
interval: 12
ask_ref_id: 12345
offer_ref_id: 177379
end
agreement:
shares: 1.89737113675e+22
swap: 236368f3e9e96745731d5d7a4c01d923c931e12688a685bae4f0c8ebf47d31d2
for: 46914567b8c8b041cf54170128534b77b650684e46f31e541884d1a63d3e40cd
plus: 8.89199078881e+17
interval: c1cf3b39c755de7cb8fc52d3f03554d3851efed0ca8fc8930e3fdecdbdd97f06
ask_ref_id: 12345
offer_ref_id: 177379
end
O.k., it doesn’t look like much because it is encrypted. That is the idea. The broker finds the agreement but the broker has no idea what the agreement contains. That is what Blind Encrypted Data Matching is all about. The broker sends the encrypted agreement to Player A and Player B both of whom know how to read it. In clear text, it says:
The agreement is that Player A swaps 10000 shares of Disney plus $17,050 dollars for a number of IBM shares that have equal value on the date of the swap. Player B provides the IBM shares, receives the Disney stock and keeps the $17,050. Player’s A and B agree to simply exchange the stock at the end of 12 months without regard to any changes in the price of IBM and Disney over the interval.
