Tokenized securities venues (TSVs) are gaining attention as Wall Street explores new ways to bring blockchain technology into traditional equity markets. The recent announcement of a joint venture between NYSE parent Intercontinental Exchange (ICE) and cryptocurrency exchange OKX to operate a tokenized securities venue has added momentum to the discussion, raising questions about how these platforms could reshape trading, liquidity and market structure. The Securities and Exchange Commission’s five-year innovation exemption, issued on September 17, opens the door for qualifying TSVs to operate automated market makers and facilitate trading outside the traditional National Best Bid and Offer (NBBO) framework, subject to certain restrictions.

However, their potential impact may be limited. In an October report, Tokenized Securities Venues (TSVs) Deep Dive, TD Securities identified proprietary automated market makers (AMMs) and multi-pool venues as the most promising models, while pointing to regulatory uncertainty, volume restrictions and weak issuer demand as significant obstacles to adoption. Reid Noch, Vice President of U.S. Equity Market Structure, TD Securities believes TSVs could find an initial use case in round-the-clock retail trading, but questions whether they will attract meaningful volumes or institutional participation. In an interview with Traders Magazine, he discusses which TSV models are most likely to gain traction, their implications for liquidity and price formation, and why the NYSE’s broader tokenization initiatives could prove more consequential than its proposed TSV.

What is the strongest use case for TSVs?

TSVs largest use case may be for 24/7 trading for retail in the near term, but as Bruce / other overnight ATSs look to service the weekend, the use case becomes less convincing.

Which TSV model is most likely to gain traction, and why?

As in our report, we think Proprietary AMMs or Multi-Pool TSVs made up of multiple Proprietary AMMs are the models most likely to gain transaction. However, as we discuss in our report, we believe no TSV will gain significant volume.

How could TSVs change liquidity and price formation in equities?

Given the constraints in the TSV relief, I doubt we will see any meaningful changes in liquidity. As for price formation, I think you will see some crazy prints, especially after hours with thin liquidity. We see this in Robinhood’s overseas AMMs, where the vast majority of volume is concentrated in meme tokens, with some of the pairs in limited volume executing multiples over previous closing price.

What are the biggest barriers to institutional adoption of TSVs?

The largest barriers are formal rule making and the harsh limitations. Exemptive relief allows TSVs to function with a stroke of a pen. However, it also can be taken away by a future administration just as quickly. Given how partisan the agencies have become, the long-term durability of this exemption remains uncertain.

On top of that, the harsh volume caps and limitations doesn’t allow for much growth. Both cases make it difficult to see institutions try to integrate a brand-new workflow into existing brokerages, custody, compliance, and trading regimes.

How significant could NYSE’s proposed TSV be for the wider market?

I think NYSE’s proposed TSV may be one of the most legit models coming to market in the near-term, but as discussed above, it will not be significant at all. I think NYSE’s tokenized ATS, which plans to launch later this year / early next year, will be more impactful.

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