Performance analysis of a blockchain process modeling: Application of distributed ledger technology in trading, clearing and settlement processes

Abstract

This study aims to assess the extent to which blockchain technology (BCT) may constitute an alternative to the conventional stock trading system and emphasize the changing roles of the key parties. It is expected that BCT would enhance the performance of the process across the three stages (i.e. trading, clearing and settlement within the stock exchange environment). A thorough literature review is conducted to understand the BCT performance modeling techniques and approaches (empirical and analytical) and to examine the theoretical potentials and capabilities of BCT in the financial markets. The case study and simulation methods are used to evaluate the impact of BCT implementation in optimizing the process of trading, clearing and settlement in Abu Dhabi Securities Exchange (ADX) stock-trading activities. This paper presents a simulation analysis comparing a blockchain system with a traditional trading system in the context of stock market. The simulation procedures involve modeling processes over different durations and transaction volumes, using metrics such as process time and cycle time to evaluate performance. The performance index combines these metrics with weights to ensure accurate and consistent measurements. Simulation results reveal that the blockchain system significantly outperforms the current trading system, especially at higher transaction volumes, highlighting its scalability and efficiency. A threshold of 30,000 transactions is identified as the point where blockchain’s benefits become apparent. The analysis shows that blockchain significantly elevate the process efficiency. It reduces both cycle time and process time across varying transaction volumes, maintaining consistency and reliability. Additionally, a simple simulation using the Hyperledger Fabric platform demonstrates the practical implementation of a permissioned blockchain for clearing transactions, emphasizing the system's capability to manage high transaction volumes efficiently and securely. The use of blockchain network for handling seamless transactions using pre-defined smart contracts significantly improves the performance of the stock trading processes, specifically in the clearing phase. Interestingly, the BCT system drops the need for a “third party” (i.e. stock custodian) across the three stages. At the end of the paper, we propose a thereat mitigating model for stock trading with a new blockchain system.

Keywords

• Blockchain
• Distributed Ledger Technology
• Stock exchanges
• Trading
• Clearing
• Settlement