The Altan Insights Guide to Trading on Fractional Alternative Asset Marketplaces
The newfound ability for the general public to invest in rare, collectible assets ranging from high-end sports cards to dinosaur fossils, is an incredible innovation that is reshaping the entire alternative investing landscape. The ability to more easily and readily sell assets such as these, is equally, if not significantly, more important.
Fractional marketplaces such as Collectable, Otis, and Rally, have each developed active secondary markets where investors can buy and sell shares of various alternative offerings after they have IPO’d. While the back-end process by which these transactions occur is similar across each firm, the timing and user experience varies depending on which marketplace you are using.
Key Terms to Know
Bid: The bid represents the price the buyer is willing to pay for a securitized asset
Ask: The ask is the price a seller is willing to accept for a securitized asset
Clearing Price: The price in which an asset is currently trading at (multiplied by its outstanding shares equals it’s current valuation, or market cap)
Lock-up Period: The time after an asset has filled with investors before it begins trading on the secondary market
Fractional marketplaces (i.e Collectable, Otis, Masterworks, Mythic Markets, and Rally) do not need to be registered directly with the SEC or FINRA in order to process secondary market orders. These marketplaces partner with FINRA, SEC, and/or SIPC registered broker-dealers to administer all transactions.
The first fractional marketplace to introduce liquidity across a wide range of alternative asset offerings, Rally pioneered the concept of secondary markets for fractional alternative investing. Assets on Rally begin trading after a post-IPO lockup period of at least 90 days, then return to the secondary market on a near-monthly basis. The clearing price is updated throughout the day based on proposed investor buy and sell orders, and their broker-dealer matches buy and sell orders at the market-clearing price at the close of trading. In the same format as Collectable and Otis, the market-clearing price is the price in which the most bid and asks can be matched. All bids that are above the clearing price and all asks that are below are eligible to be matched at the current clearing price. So for example, if the clearing price for an asset is $40 but an investor places an ask for $30, the ask will be matched at cleared at $40. Regarding timing, Rally’s trading window is the same as the New York Stock Exchange, with trading occurring between 9:30 AM ET and 4 PM ET. The primary difference is that trading occurs two days per week, Tuesday and Thursday, and only certain assets trade each time. Investors can only place bids and asks for an asset on a day when it is actively trading, and are able to adjust their bid or ask throughout the trading session. Rally does not currently charge trading fees.
Collectable’s secondary market utilizes an Alternative Trading System (ATS) through a SEC-registered broker dealer, Templum Markets LLC. Collectable offers daily trading on their secondary market. Investors can place post-only bids and asks at any time, 24/7. This gives investors a sense for the direction of a particular asset outside of the periods in which the bids and asks are matched. Matching on Collectable occurs between 3-4 PM ET Monday-Friday during what they call a “Power Hour”. This is a time period that supports instantaneous matching for all bids and asks that meet the current clearing price. Collectable is active in combating price manipulation on its platform and only accepts bids that are within a 10% range (+/-) from the current clearing price. If an investor places both a buy and sell order simultaneously the orders are rejected and any orders deemed suspicious are flagged and reviewed. Investors must have enough funds in their wallet on Collectable in order to place bids, and no orders can be placed on margin.
Fee: On Collectable, investors pay a 1% brokerage fee for each buy or sell order they place that is matched.
The trading platform on Otis is similar to Collectable in that bids and asks can be placed 24/7. The primary difference between the two is that Otis does not have a set hour in which matching occurs, but instead matches and clears orders daily at 9 PM ET while prices are updated in their app at 2 PM ET. New assets open for trading at 3PM ET for their first day on the Otis secondary market with their first window closing at 2 PM ET the following day.
The clearing price on Otis is set based on where bids and asks overlap. In the case where there is overlap at more than one price point, clearing price is set at the price where the most shares will clear. The following example is from the Otis Trading FAQ page.
As you can see, there is overlap at each of the three price points, but because bids can only be matched if the price is at or below, and asks can only be matched if the price is at or above, the greatest number of shares that could be matched here would be at $15. Since all the overlapping $15 bids/asks can be matched and the five $20 bids can be matched with the $10 asks, they can also be matched at $15.
In cases where there is a clearing price imbalance, like if there were 5 bids at $20 but only 3 asks at $10, the bids placed earliest would take priority to match with the ask shares. The leftover bids are then rolled over and resubmitted for the next window.
Since pricing is not an exact science and shares can clear at multiple prices depending on the bid and ask spreads placed by investors, if multiple prices are cleared, the average price is the clearing price displayed. Orders that are not cleared remain open for the next trading window until they are either matched or cancelled by the investor.
Similar to Collectable, investors must have enough funds in their Otis account to cover their bid. There are currently no trading fees on Otis.
Unlike the first three fractional platforms discussed, Masterworks utilizes a trade matching process that allows users to match their own buy and sell orders. If an investor holds shares of an artwork that is eligible for trading they can put those shares up for sale by entering an Ask price and the number of shares they are willing to sell. Prospective buyers can then review the list of asks under the ‘Buy Shares’ section on the Masterworks website and either purchase or send the seller a counter offer. Sellers can then accept, reject, or adjust their ask appropriately.
Regarding fees, currently there are no fees to use the trading platform for most actions beside a $1.50 wiring fee charged when an investor wires funds to their Masterworks wallet. Masterworks also actively works to protect investors from market manipulation by preventing two-sided quotes in which a participant indicates a bid to buy a security at one price and an offer to sell that same security at a higher price.
Mythic is expected to open their secondary market on April 20th with four assets initially available for trading. The initial design of the marketplace will allow investors to trade once per month - every third Tuesday, from 9:30am - 4pm EST. All funded assets will be available for live trading on each trading day, except those still in the lockup period following funding. There will be no transaction fees when Mythic opens trading with all processes and procedures subject to change.
Liquidity is an important piece of the fractional marketplace puzzle and is a crucial function that offers a level of safety and solvency for investors. This guide is meant to be a snapshot of the current secondary market landscape across the firms offering fractional assets. Investors should expect future developments focused on improving and streamlining the secondary market process.