Crypto’s Market Structure Forcing Institutions Back to 80s


by Hu Liang, CEO & Co-founder of Omniex

“When this baby gets up to 88 mph, you’re gonna see some serious shit”. – Doc Brown

The institutionalization of crypto is very real, and near. Need proof? Look no further than giants like Blackrock, Goldman and Fidelity having made their interest in crypto public, and recent research from Greenwich Associates shows an overwhelming majority of institutions believe crypto is here to stay. 

But there’s still a way to go. 

Market fragmentation has made trading crypto far more reminiscent of the 80s’ Wall Street propelled by slate grey brick phones, printed trade tickets and double-breasted blazers than any modern market. 

While that may be suitable for individual investors, for institutions to raise and invest external funds, they’ll need to make a leap forward in their crypto trading technology to overcome these market structure challenges and fulfill their duty of ensuring best execution for their funds’ and clients’ orders. 

Is best execution even possible in crypto?

Best execution – or “best ex” as it’s known colloquially now – has become so critical to global capital markets that regulators across Europe, Asia and North America have all embraced some form of the mandate. At its core, best ex is defined as the most advantageous order execution price for clients in the prevailing market conditions. 

But the concept has gone beyond just the instances of brokers executing trades for clients. Investment funds now are also expected to achieve best execution as they manage the funds for LPs either directly or via intermediary services.

In traditional asset classes such as equities, fixed income or FX, achieving best execution is a fairly straightforward process with transparent, streaming prices from multiple venues, and trades electronically executed by smart order routers and algorithmic trading tools. These tools have been trained by years of historical trading data, bid-offer spread characteristics and market volatility patterns. Accompanying reporting tools are also available to show cost of execution and relay vital information to the trader and portfolio manager.

In the volatile and fragmented world of crypto, however, finding the best price for clients across a wide range of crypto exchanges, all around the world, with actionable liquidity is impossible without an advanced suite of trading technology.  Add in a set of OTC market participants and trading desks quoting prices via phone, Skype or Messenger, an institutional investor will be hard pressed to achieve satisfactory execution let alone best execution.

As sophistication of crypto fund managers and traders increase, this deficiency in market infrastructure is starting to become apparent. While in the past year, crypto specific fund managers with relatively small portfolio holdings have focused attention on simply entering the market to gain participation, as the market matures and volatility subsides, these more sophisticated, larger-scale entrants will realize a few basis points lost or gained from trading activities will materially affect portfolio performance over time.

There simply isn’t enough time for the institutional trader to sit in front of multiple exchange terminals with vastly different interfaces to manually execute trades. Worse yet, traders have to pick-up the phone or Skype call market makers for a quote while they keep their eyes on data terminals to track market movement. 

From a best execution standpoint, it would seem like a lost cause.

Crypto traders’ Flux Capacitor

For an institution to achieve best execution in crypto, it needs to invest in trading technology purpose-built to handle the unique characteristics of crypto trading.

So what does that look like?

First and foremost, it has to be built from the ground-up for crypto. Sure, FX is similar and the lessons those of us that brought FX into the algo age learned should be heeded, but these are fundamentally different markets; depth of liquidity, spread characteristics and volatility patterns are all arguably different. From wider price discrepancies across venues to cross-jurisdictional compliance concerns, simply retrofitting technology from another asset class won’t capture the nuances of crypto and doing so could introduce operational risks.

Second, it has to be compatible and flexible to work seamlessly with crypto market participants and emerging infrastructure, including all major liquidity venues, OTC desks, crypto custodians, fund administrators and even the new breed of banks supporting crypto funds. It’s not just about accessing one particular participant in the ecosystem, it’s about connecting to all the ecosystem players seamlessly.

Finally, it has to be comprehensive. After the billions upon billions poured into creating straight-through-processing (STP) whenever possible, why would an institution not seize that from day one of their crypto trading operation? For institutions to seize the opportunities in crypto, their trading technology must range from front-office portfolio management to the middle-office risk, order and execution management to back-office investment operations and settlement. 

Where we’re going, we’ll need roads

To be sure, trading and investment technology will only take institutions so far, as regulators provide the clarity institutions seek and the market participants develop institutional-grade infrastructure for facets like custodianship.

That maturation of our ecosystem has, and will continue to take significant time, effort, regulatory clarity and support from across the industry. 

The waves of financial professionals leaving traditional banking to create new platforms and services specific to crypto bodes well for the institutional adoption of crypto assets. While the result won’t be overnight, the efforts are concerted and the momentum is strong.

To thrive in the tokenized future of global financial markets, institutions must seize the first-mover advantage in the institutionalization of crypto by adopting trading and investment technology purpose-built to seize the opportunities of this new asset class.

If they do make that leap forward, they’ll be equipped to make crypto a core plank of their fast-paced operations and source of boundless opportunity at the forefront of institutional finance. 

Hu Liang is Co-founder and CEO of Omniex, an institutionally-focused investment and trading platform for cryptoassets.

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