The stock token debate, and the gap nobody can close alone

To limit the effects of price dislocations on the underlying stock, the SEC’s exemption caps onchain trading at 0.25% of the large-cap stock's average daily volume, and 2.5% for all other listed stocks. Wrapped tokens issued offshore to non-U.S. holders, Robinhood’s included, fall outside SEC jurisdiction and carry on as is.

The wrapped token

Wrapped tokens have demonstrable utility, especially in emerging markets where access to US equities is restricted or expensive. Robinhood's Stock Tokens cover more than 190 companies across 120 countries; xStocks and Ondo do the same job through different plumbing. Outside the U.S., the model requires no agreement from the issuer, no entry on the shareholder register, and no authorization in each market. That is the source of its reach, and of the counterparty risk the holder carries.

The wrapped token expands distribution at the expense of potential dislocations from the underlying price, as well as investors’ rights and issuer transparency. The constraint is not Robinhood's schedule, or any other issuer's. In reality, price discovery does not stop when the NYSE or Nasdaq do; many brokers, retail and institutional, remain operational off-hours and accepting order flow from takers on- and off-shore of the U.S., hedging out their risk with overnight venues and derivatives. However, the ability to source the underlying shares in size is severely diminished when the primary exchanges are closed. So the holder has a claim but no market to convert it outside of the NYSE’s regular session, which runs only 32.5 out of 168 hours in a week. Outside market hours, the premium between the token and the share's last close is a risk the buyer carries and pays for when the price converges at the open.