1.1 Traditional Market Inefficiencies and Barriers

Western equity markets are among the most sophisticated in the world, yet they still harbor a number of structural inefficiencies and barriers that hinder optimal performance and broad investor participation. These legacy issues arise from decades-old market practices and infrastructures, and they manifest in high transaction costs, delays, and opaque processes. In this section, we examine several key inefficiencies in traditional equity market structures – with a focus on the United States and other Western markets – and illustrate their impact through real-world examples. This analysis will highlight why these entrenched problems matter to investors and companies alike, especially tech founders, research leaders, and venture capitalists who value efficient and transparent markets.

1.1.1 Settlement Delays and Counterparty Risk (T+2 Cycles)

One of the most frequently cited inefficiencies in traditional equity markets is the delay in trade settlement. Historically, stock trades have settled on a “T+2” basis – meaning that when you buy or sell a share, the final exchange of cash and securities occurs two business days after the trade date. While this two-day settlement cycle evolved as a market convention to allow time for paperwork and error correction, it introduces significant counterparty risk. During the gap between trade execution and settlement, one party to the trade could default or fail to deliver on their obligation. For example, if an investor purchases shares on Monday, they are not guaranteed to receive those shares (and the seller is not guaranteed to be paid) until Wednesday. In volatile market conditions, the price of the stock could swing dramatically in those two days, raising the stakes if either side were unable to fulfill the deal.

Clearinghouses step in to mitigate this risk by acting as central counterparties – essentially, the clearinghouse becomes the buyer to every seller and the seller to every buyer during the settlement window. However, this risk protection is not free. Brokerages and clearing firms must post substantial collateral (margin) to the clearinghouse to cover potential defaults in the interim. A vivid illustration occurred during the early 2021 GameStop trading frenzy: the extreme volatility of meme stocks caused clearinghouses to dramatically increase margin requirements. Firms like Robinhood suddenly had to post billions of dollars in collateral to cover the two-day risk exposure, which in turn forced them to restrict trading in those stocks. This incident underscored how a T+2 settlement delay can translate into liquidity strains and systemic risk, ultimately impacting end-investors (in this case, preventing retail traders from buying certain shares at the peak of the frenzy).

Beyond such extreme events, the routine capital costs of maintaining margin for pending settlements add up and make the trading ecosystem less efficient. Operational risks are also higher with a longer settlement cycle – there is more time for something to go wrong, whether a technical glitch, human error in trade matching, or a counterparty going bankrupt. Modern technology makes it feasible to settle trades much faster (indeed, some markets are moving to T+1 or even same-day settlement), yet many systems still rely on the older cycle. The persistence of T+2 in most Western markets through the late 2010s and early 2020s reflects the difficulty of overhauling legacy infrastructure and coordinating all market participants. However, the cost of this delay is clear: it is an antiquated friction in an era when digital transactions in other domains (for instance, payment networks or cryptocurrency transfers) can occur almost instantaneously. (A flowchart diagram could illustrate the timeline of a trade from execution to T+2 settlement, highlighting points where risk and delays are introduced.)

1.1.2 High Cost of Intermediation (Brokers, Custodians, Clearinghouses)

Traditional equity trading involves a long chain of intermediaries, each adding complexity and cost. When an investor buys a stock, their order might go through a broker-dealer, an exchange or trading venue, a clearing broker, a central clearinghouse, and finally settle via custodian banks and central depositories. Each of these entities provides a service – trade execution, matching, risk assurance, safekeeping of assets, etc. – but each service comes with fees or embedded costs. Even as trading commissions for retail investors have dropped to zero in many cases, the underlying costs of market plumbing remain and are often passed along in less visible ways.

For instance, brokers and exchanges may earn revenue via spreads or payment for order flow, clearinghouses charge clearing fees and demand capital for margins, and custodians charge custody and settlement fees. These costs can be especially burdensome for cross-border transactions. Consider a scenario where a U.S. investor wants to buy shares of a company listed in Europe. The investor’s U.S. broker might have to route the order through an international broker or exchange, utilize a foreign custodian to hold the shares, and engage with a clearing system abroad – each step incurring its own fees and foreign exchange costs. The result is a stack of fees and operational expenses that make international diversification costly and complex for smaller investors. Even large institutional investors face significant overhead from these layers; they employ entire operations teams and pay substantial fees to manage trading and custody across different markets.

From the perspective of companies (issuers), these high cost structures can also be a barrier. Companies pay listing fees to exchanges, and whenever they undertake corporate actions (like issuing new shares, paying dividends, or splitting stock), they must navigate fees and procedural requirements from transfer agents and clearing systems. The involvement of multiple intermediaries also means longer feedback loops and potential reconciliation issues – for example, if a mistake occurs in a trade or a corporate action, resolving it can require coordinating between several different entities, each with their own systems. Overall, the multi-layered architecture of traditional equity markets, while designed to manage risk and specialization, results in inefficiencies that increase the cost of doing business. These costs ultimately reduce returns for investors and raise the expense of capital for issuers, acting as a drag on market efficiency. (For clarity, a visual diagram or table could be used here to map out the various intermediaries in a typical trade and the types of fees or delays each can introduce.)

Another barrier in traditional markets is the fragmented and opaque nature of share custody and ownership records. In most Western markets, when you buy shares of a company, you do not take physical possession of a stock certificate nor are you typically registered directly on the company’s books as a shareholder. Instead, your shares are likely held in “street name” by your brokerage, which in turn might hold them through a custodial bank, which ultimately holds an aggregate of shares with a central securities depository (for example, the Depository Trust Company (DTC) in the United States). This tiered custody chain means that the true beneficial owner of shares (e.g. an individual investor) is several steps removed from the official registries.

This structure leads to opacity in knowing who actually owns and controls shares at any given moment. A company’s official shareholder register might only list a few large nominee entities (like “Cede & Co.”, the DTC’s nominee name, which collectively holds the bulk of U.S. public company shares on behalf of brokers), rather than the actual investors. For corporate governance and communication, this is less than ideal. Companies often have to rely on intermediaries to communicate with their shareholders (for instance, sending proxy voting materials or corporate disclosures to the brokerage, which then passes them to the investor). Important messages can be delayed or lost, and shareholder feedback to the company is indirect. Likewise, investors may find it cumbersome to assert their ownership rights. For example, a tech founder who holds shares in a competitor’s public company might want to vote at that company’s annual meeting or join a shareholder resolution. To do so, they often must obtain a legal proxy or other proof through their broker, since their name isn’t on the official books – a process that can be slow and confusing.

Fragmentation also shows up in how trading and record-keeping systems are not unified. In modern markets, the same stock can trade on multiple exchanges and alternative platforms simultaneously. While trades ultimately settle in one central depository, the existence of disparate trading venues can create information silos in the short term. Different brokers and exchanges might have only partial views of the total trading activity, and inconsistencies have to be reconciled after the fact. This complexity doesn’t necessarily stop trades from completing, but it introduces extra steps to consolidate records. Moreover, if a problem arises (like a trading error or a question about who owned shares at a particular time), untangling it requires tracing through these layered records. The lack of a single transparent ownership record is thus a foundational inefficiency – it hampers transparency, slows down processes like voting and settlement, and can even enable hidden risks (such as undetected build-ups of large positions by a single beneficial owner through multiple brokers).

1.1.4 Barriers to Investor Access and Participation

Traditional equity markets, as they operate today, also present barriers that limit access for certain investors. One such barrier is the high price of individual shares for some successful companies. While a high share price is ostensibly a sign of a company’s success, it can put direct ownership out of reach for investors with smaller budgets. For example, before recent stock splits, a single share of companies like Amazon or Google (Alphabet) cost on the order of $1,000–$3,000. A young tech entrepreneur or junior engineer looking to invest might find it impractical to buy even one share at those prices. Some brokerages have introduced fractional share trading to address this, allowing investors to buy, say, 0.1 of a share. However, fractional ownership is not universally available and typically exists as an internal service of a broker rather than a native feature of the market – meaning you cannot easily transfer your fractional shares to another platform or person. The lack of standardized fractional ownership in traditional markets thus keeps investment in high-priced stocks less accessible and less portable than it could be.

Geographic and jurisdictional restrictions form another access barrier. Stock markets around the world are often fragmented along national lines, with regulations favoring local participation. A venture capitalist based in Europe might face hurdles in directly investing in a mid-cap tech company listed only in the United States, and vice versa. In practice, international investors often must go through extra steps such as setting up special brokerage accounts, dealing with currency conversions, and navigating tax treaties. Some popular global companies arrange cross-listings or use instruments like American Depositary Receipts (ADRs) to reach foreign investors, but these solutions cover only a fraction of available securities and can introduce additional layers of fees and complexity. The end result is that many investors are effectively locked out of markets abroad, or incur higher costs to participate, which runs counter to the ideal of free capital flow in a globalized economy.

Even within a given market, there are participation hurdles for certain types of investors. For instance, small investors historically had limited access to initial public offerings (IPOs) or private placements, which were typically reserved for large institutions – though this is partly a regulatory issue beyond just market structure. More pertinently, the timing and hours of markets can be a barrier; traditional exchanges have fixed trading hours on weekdays, which may not align with the schedules of people in different time zones or with modern expectations of 24/7 access (something crypto markets have accustomed tech-oriented investors to expect). While after-hours trading exists, it is often limited in liquidity and fraught with wider spreads. All these factors contribute to a landscape where market access is uneven – favoring those with larger capital, the right connections, or the convenience of being in the same locale as the market. For a truly inclusive market, these barriers would need to be lowered or removed so that participation depends more on the investor’s insights rather than their geography or wealth. (A comparison table could be useful here to summarize different access barriers – for example, contrasting traditional market constraints on minimum investment size or cross-border trading with how a more modern or tokenized approach might alleviate these.)

1.1.5 Limited Transparency in Ownership Rights and Encumbrances

Finally, traditional market structures suffer from weak transparency in certain aspects of ownership and governance, notably around insider activities and rights attached to shares. One critical issue is the pledging of shares by insiders (company founders, executives, or major shareholders). In many cases, insiders may use their stock holdings as collateral for loans or other personal financial transactions. While such pledging in Western markets is often legal, it is not always clearly disclosed in real time to other investors. The risk here is that if an insider who has pledged a large block of shares runs into financial trouble, their lenders might suddenly sell those shares into the market to recover the loan, potentially causing a sharp drop in the stock price. Other shareholders would be caught by surprise, unaware that those seemingly long-term held insider shares were effectively encumbered and at risk of forced sale. Transparency around pledging has improved somewhat – for example, companies may announce in proxy statements whether executives have pledged shares, and some exchanges recommend or require disclosure – but it is far from comprehensive or standardized. The lack of immediate, granular visibility into such arrangements means an important risk factor can lurk in the shadows of a company’s ownership structure.

Similarly, there is often limited visibility into voting rights and other special rights attached to shares. Modern tech companies have frequently issued dual-class shares, where founders and insiders hold shares with superior voting power. While the existence of such classes is disclosed, the practical implications (e.g. that insiders can outvote the rest of shareholders combined) may not be fully appreciated by every investor, or the information might be buried in filings that many retail investors never read. Moreover, the process of voting in corporate elections is itself rife with opacity and potential confusion. Because of the earlier-mentioned custody chains, when an investor votes their shares through their broker, the votes pass through several hands to be counted. This can lead to situations like over-voting or under-voting (where the number of votes cast doesn’t perfectly match the number of shares due to timing and reconciliation issues). In high-stakes proxy battles or takeover votes, such discrepancies have led to legal disputes and mistrust in the system. For example, there have been cases where more votes were cast than there were shares outstanding, due to shares being lent out to short sellers or delays in record updates – highlighting how encumbrances and lending can complicate the notion of who “owns” a vote at a given time.

Encumbrances on shares can take various forms beyond pledging – including legal locks (such as lock-up periods after an IPO during which insiders can’t sell), liens, or use of shares in derivative contracts. Each of these can restrict the free transferability of the shares or transfer certain rights away from the nominal owner. However, information on such encumbrances is scattered and not easily aggregated for investors. A portfolio manager or a diligent VC might dig through footnotes in financial statements or scour regulatory filings to find hints of how many shares are pledged or otherwise encumbered in a company, but there is no real-time public dashboard of this crucial information. This lack of transparency means market prices might not fully reflect the true supply of freely tradable shares or the risk that certain large holders could be forced to sell. It also means that minority investors have a harder time assessing governance risk – for instance, determining if a founder’s interests are aligned (unencumbered ownership suggests skin in the game, whereas heavily pledged ownership might indicate personal leverage). All told, the traditional system’s patchy transparency about ownership rights and encumbrances represents yet another inefficiency. It undermines informed decision-making and can erode trust, as investors may only discover critical information when it’s too late.

In summary, Western equity markets – for all their depth and maturity – still operate with significant inefficiencies in settlement, cost, custody, access, and transparency. These issues create friction and risk that savvy investors and entrepreneurs cannot ignore. Each inefficiency highlighted above presents an opportunity for improvement, and indeed the industry has started to seek solutions (from regulatory reforms like shorter settlement cycles, to technological innovations like digital ledgers and tokenization of assets). In the following sections, we will explore how emerging market structures and technologies aim to address these traditional pain points, potentially ushering in a new paradigm for how equities are issued, traded, and owned.