Systemics Announces First Internet Trading System

[Robert Hettinga <rah@shipwright.com>]

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Date: Thu, 18 Jul 1996 12:48:03 +0200
From: Ian Grigg <iang@systemics.com>
To: rah@shipwright.com
Subject: Systemics Announces First Internet Trading System

Systemics Announces First Internet Trading System

17 July 1996. Copyright (c) 1996 Systemics Ltd.

1996 could well be the year that marks the start of the Internet Financial
System. Consider these developments:

       * Intense competition between rival payment systems has erupted as
       the large payment institutions have woken up - the new territory is
       on the Internet.
       * Earlier this year The Spring Street Brewery surprised Wall Street
       by conducting its own IPO - by the simple expedient of using the
       Web as a communication medium. After several weeks of hectic
       phone answering, CEO Andrew D. Klein realised he was in the
       wrong business and announced plans to start a new industry:
       Internet investment banking.
       * Across the pond in that other giant of international finance, the
       paperless trading system Crest starts up this week at the London
       Stock Exchange, signalling massive job losses. The exchange's
       troubles began late last year when exchange-member ShareLink
       was discovered delivering trading information on the Internet. The
       exchange severed ShareLink's "feed". Claim led to counter-claim,
       with litigation close behind, in a slanging match that ruptured images
       of the calm, polite English way of trading. Before saner heads could
       move in to force closed-doors negotiations, the palace revolution
       was underway. Suing one of ourselves? It's just not cricket.

And now, Systemics Ltd has added in the last remaining ingredient, the
Internet Stock Exchange. After a year of hectic, but secret, development
by a small team of cyberventurers, the Exchange went live in June with
Systemics own debt. A cohort of private investors were placed with
Systemics bonds, which now trade on a nightly basis. Trades have been
mostly small and experimental, as the investors, all computer professionals,
get to grips with the new-found power of instant access to the 'market'.

The Genesis of a new Financial System

Ian Grigg, co-founder of the team, concentrates on the business aspects
during the daytime, and in his spare time, helps with coding the market. "It
seemed like a simple thing back then, take the basics of digital cash, add in
securities, and build a market to trade the securities for cash."

In the summer of last year, co-founder Gary Howland was working on digital
cash protocols for DigiCash. Meanwhile the Internet was exploding into the
public eye, as conventional media started to realise the potential of the new
medium. Howland conducted long email discussions with his future
co-founder. "There was this awesome potential energy, just sitting around
in the digital cash concept waiting for chance to go kinetic."

Grigg was attending lectures on Finance as part of an MBA from London
Business School. "In the day time, I was learning the basics of what a bond
was, and at night we would have these unlimited discussions on where the
net was heading. With each lecture, each discussion, the feeling was getting
stronger - we had the tools in front of us. We could build an Internet
Financial System."

The Systemics team aren't the only ones to have seen the potential. Bob
Hettinga, a prolific net writer, had described the basic concepts as much as a
year before. Grigg thinks that it took the combination of diverse skill sets
and motives for ideas to turn into reality. "We're continually surprised that
nobody else saw it and jumped in. But if you analyse the work that went in
to the software and the building of knowledge in the core disciplines, it
really
is a major project that is too risky for any conventional company. I would
guess it can only be done by a small, tightly focused team with key
individuals. Or, by one of those great, wide ranging alliances that bring in
diverse stake holders."

The Internet Financial System will consist of Issuers, Payment Systems,
Markets and Investors, just like in the physical world. An Issuer runs a
special service suite on the Internet to manage the financial instruments.
Those instruments are placed by the Issuer with a private group of
Investors. Then, when the Exchange accepts the issue and runs a Market in
that instrument, Investors can trade the instruments using Systemics
Trader, a specialised browser. Instruments are bought and sold for digital
cash, provided by an Internet Payment System.

The Systemics team are proud of what they have achieved. Grigg explains:
"The small investor gets direct access to the markets. Settlement is
immediate - when the trade is done, the money or instruments are waiting
for collection. And with the security of modern forms of cryptography, there's
a lot of peace of mind. This Exchange carries no risk, which results in a cost
to the Investor that is so small that it creates a new segment."

Internet Trading Takes Off

In the first instance, it was necessary to prove the system under real trading
conditions. Systemics issued its own debt as one year zero coupon bonds
with a face value of USD 10. Each of the investors was given a tranche at an
issue price of $9, allowing investors to earn a dollar for every nine dollars
invested over the full year. To manage the portfolio of cash and bonds, each
investor downloaded Systemics Trader.

On the 25th of June, the first live market was opened by the Exchange for
the first investor trades. "Since then, we have gradually settled into a
routine. The market opens at 1915 GMT, for a six hour trading session.
This time slot seemed to give the best access for our investors, who
are located in diverse time slots and daily patterns."

Trades are not frequent as people who have never traded before get to grips
with the concept. "Our investors are all long term associates who understand
the future of the Internet. They were keen to invest in what we think is
the most advanced project on the Internet today. For all that, trading got
off to a slow start as investors proved initially timid at risking their
own cash and bonds."

However, within a week, the backers are showing all the signs of an
aggressive investor community. "If they're not happy, they don't trade."
Demands for additional instruments caught Systemics by surprise, as
investors pointed out that without a comparison between instruments, there
is no decision on value. "It's obvious in hindsight, there's a limit to what
people can do in a one-bond exchange." The challenge now is to decide on
alternative instruments.

Secure Payments are based on Cryptography

At another level, the Exchange is just a complicated shop on the Internet. It
buys and sells financial instruments for cash, and relies on a secure value
transfer system to make the trade.

"When we laid down the strategic components a year ago, there was no
sure availability of any payment system, let alone one up to the rigors of
finance. So we had to do our own," said Howland.

In a forthcoming paper, he describes a design for a digital payments
mechanism built upon the cryptographic key format in Phil Zimmermann's
Pretty Good Privacy, the Internet standard for email encryption and digital
signatures. "PGP is the only system that is widely available and provides
good security. The challenge was to turn it from a message passing system
into a value passing system." The Systemics payment system works on the
notion of a value-containing box that is controlled by a PGP key. A server
holds the public key, anyone who has the private key can control the box.

A box can be used as an account, allowing the conventional management
schemes of accountancy to be used. In this case, the server ascribes value
to the box, and the users write instructions to transfer value from one box
to another.

Or, it can be used as a coin, allowing cash emulation. In this case, users
transmit secret keys, and coins are cashed in by issuing instructions to
transfer the value in a received coin to a box account.

Howland states that this design allows for immediate settlement in both
financial instruments and cash, a critical issue in financial markets. Also,
the use of PGP keys makes independant verification of the protocols a
relatively low cost task by leveraging off of the enourmous amount of trust
placed in PGP.

Systemics believes in open cryptography. "We intend to publish all our
protocols with example software, and our goal is to publish a complete and
working payment system. Cryptography and digital payment mechanisms
are socially beneficial and should be widely disseminated." Systemics have
already published their Cryptix library, providing strong cryptographic
solutions for Java and Perl developers.

The Investor Takes Control

Systemics Trader, the specialised trading browser, is written in Java. "As
far as we know, this is the first serious application written in Java outside
Sun itself," commented Mike Wynn, author of Systemics Trader. Working as
an HTML browser, Systemics Trader can pass through firewalls set up to
allow WWW browsing. This has doubled the potential user base; about half
of Systemics' investors work on secure systems.

Systemics Trader manages a portfolio of financial instruments and cash
using a 'box' as a digital account. 'Limit' and 'Market' orders can be
submitted, tracked and cancelled. The 'board' for market instruments can be
monitored on an investor-demand basis, so as to present the latest prices
to the investor.

A secure registered mail protocol is used to ensure messages containing
value get delivered from the Exchange to the investor. Given the vagueries
of the Internet, Systemics Trader has to sign for each payment that is sent
to it before the payment is considered to be delivered. Then, both parties to
the trade know that the deal is done.

Future versions will manipulate both digital cash and digital accounts, as
well as multiple currencies. Real-time feeds are also a possibility. For now,
however, Systemics is concentrating on building in the basic features and
reliability that risking an individual's money will demand. Wynn's plans are
oriented towards the developing a trading library that can be used as the
basis for a whole class of browsers. "In the short term, our investors and
testers are still proving the system for us. In coming weeks, we intend to
release a new version of Systemics Trader for widespread demonstration
purposes on our test markets."

An Internet Team

Systemics Ltd, an Irish company, holds the brand and fronts for the team in
any formal discussions. But the real capital is in the heads of the many
individuals who have contributed. Outside the tiny core is a small group of
"insiders" who contribute ideas, software development and testing. And
outside this group is the Internet software community. Enourmous amounts
of freely available software have gone into the system, making the efforts of
the group just the tip of the iceberg, and the core team just the bunch of
penguins sitting on the tip.

"We are an Internet team, not a company in some office. What some are calling
the virtual company is really a series of concentric circles flowing out
over the Internet. The pebble dropped in the centre of the well is the idea,
the development waves move out and reflect back in to form the product.
Think about Internet development as that big node where all the waves rush
in to one point."

Acknowledgements

This information release from Systemics Ltd. Copyright 1996 Systemics Ltd.
Free and widespread distribution is permitted, as long as attribution is
maintained. Please point your readers at our home page:
http://www.systemics.com/. This release will be located in
docs/releases/1996-07-17.html

Systemics, Systemics Trader and Cryptix are trade marks of Systemics, Ltd.

The Spring Street Brewery can be found at http://plaza.interport.net/witbeer/
and Wit Capital at http://www.witcap.com/

ShareLink is at http://www.esi.co.uk/sharelink/. Also see InfoTrade
http://www.infotrade.co.uk/.

Bob Hettinga, prolific net poster, is at http://www.vmeng.com/rah/ or rather,
his e$ homepage is. Subscribe to the e$ mailing lists for the latest digital
cash gossip.

Pretty Good Privacy and PGP are trademarks of PGP, Inc. Phil Zimmermann
and PGP are thse days better found at their new corporate home:
http://www.pgp.com/

Java is a trademark of JavaSoft, found at http://www.javasoft.com/

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-----------------
Robert Hettinga (rah@shipwright.com)
e$, 44 Farquhar Street, Boston, MA 02131 USA
"'Bart Bucks' are not legal tender."
                -- Punishment, 100 times on a chalkboard,
                       for Bart Simpson
The e$ Home Page: http://www.vmeng.com/rah/