How the London Stock Exchange, a ski trip in the French Alps and a desire to make blockchain-based trading faster have all come together

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In 2008 it took about four milliseconds for equities to be bought and sold on the London Stock Exchange, the equivalent of four beats of a housefly’s wings. For the owners of the exchange, it was far too slow. Barney Mannerings was brought in to help shave some time from the roundtrip transaction.

“We were working on a number of things, latency was always a big one,” he said to me recently. “They had noticed that every time the latency went down the revenue went up, so we were trying to get to sub-millisecond.” After switching the software the exchange’s matching engine used they hit their speed goal.

Ten years later, Mannerings had left the traditional financial world for defi, but he still had speed on his mind. Yet unlike the centralized nature of the LSE, Mannerings wanted to create a robust and fast trading system that was decentralized, or peer-to-peer, and connected to a blockchain.

On a ski holiday in the French Alps in early 2018 he decided to build a simple matching engine for crypto trades in the software language Go (because really, what else is there to do in the French Alps?)

Probably not the same chalet. Photo courtesy of Unsplash

“We had a little chalet,” he said. “It was quite a good walk up the hill, which was probably helpful for me getting stuff done in Go because when other people wanted to go out the bar, I was kind of sat there with my laptop and that seemed like a long way,” Mannerings said. A few missed nights out though resulted in a key piece of what Mannerings is now doing.

“We managed to get this thing producing blocks and running a network and being – for all intents and purposes – a spot exchange,” he said. While it had no security features or other trading protocols “it was a blockchain using a real proof-of-stake network effectively running a spot matching engine.”

The block time was under two seconds, an eternity in markets like stocks or futures, but actually quite fast for a blockchain. (Ethereum has a block time of about 13 seconds, Solana says it has a 400 millisecond block time and Bitcoin takes about 10 minutes). For Mannerings and the people he was working with it meant their project, Vega, could now be built.

“It was a pivotal moment,” he said. Given that matching engines – the code that connects buyers and sellers in a variety of possible ways – are finicky and need to be finely tuned, Mannerings knew the hard part was out of the way. “The rest of what we needed to do would be about building the infrastructure around it.”

Vega

Vega launched a “restricted main net” last year, he said, while in late June or July it will go into wider release. Trading on Vega will involve derivatives on digital assets and be peer-to-peer, what’s known as a decentralized exchange.

His time in London taught Mannerings if you want to build a new market for an asset it will take years, cost millions of dollars and is generally off limits to most people. At the same time, the way the Internet upended many industries in the early 2000s by knocking down barriers to entry never really happened in finance.

“It’s still very gatekeepered, it’s still very expensive and it’s still not really open to the level of permissionless innovation that the Internet has made many things open to,” he said. Vega is meant to offer users a fast execution layer that they can use to deploy derivatives contracts, much like how Ethereum offers a consensus and validation layer for all the smart contracts that are issued on it. It’s a build it and they will come approach.

“If Ethereum is a general-purpose base layer compatible with finance and value on chain,” Mannerings said, “then we see Vega as a specialized extension that enables certain” types of trading.

In the U.S., the Commodity Futures Trading Commission requires any exchange offering futures to be registered and obey a number of core values. Mannerings said Vega isn’t a U.S.-based company and isn’t advertising in America, yet he acknowledged the rules are murky and subject to change. The most recent regulatory guidance appears to be that a firm like Vega – similar to how Ethereum operates – won’t be breaking any rules if it simply writes software that other people deploy.

“Right now, that is something you can do and you’re not operating an exchange” or offering securities or derivatives, Mannerings said.  

One reason derivatives trades are regulated and restricted to certain investors in the U.S. is because of the potential for far greater losses than in other asset classes. Futures are bought and sold using margin, which only represents a small portion of the cost of the trade, a type of leverage that can go very wrong. Mannerings noted that different countries have different views on this risk, such as the UK which has a looser standard.

Vega is implementing margin controls and an insurance fund to help it weather any blowups, he said.

“The goal is this infrastructure contains all these components for doing order books, for doing batch auctions, for doing margin management and running risk models and all of these different things,” he said. “These components can be composed together and used to build a variety of interesting types of market products.”