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P&L Talk Series with Edward Woodford

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P&L Talk Series with Edward Woodford

Edward Woodford, the co-founder of the trading venue Seed CX, talks about what it really means to offer an institutional grade platform in the rapidly evolving crypto market.

Profit & Loss: You recently secured $15 million of investment. There’s obviously a lot of crypto-related ventures out there looking for investment, what was the focus of your pitch?

Edward Woodford: The key is that we’re entirely focused on the institutional market, which in turn affects how we build our systems, how we build our products, and it dictates our entire outlook and approach. The trend that we see is more institutional players coming into this space, this institutional flow dominates retail flow, and we’re looking to service these institutions.

P&L: What does that mean in practice?

EW: It means that we’ve designed our technology to ensure that it’s very robust and that it uses systems that are used by major financial institutions, including FIX API. But it’s also things like how we’ve built our account structure, and I know this isn’t particularly sexy for firms used to operating in very sophisticated markets, but in the crypto space a lot of the platforms only have one account, so you end up with 40 or 50 traders using the same login, which presents fundamental vulnerabilities. By contrast, our system is designed so that the principals of a trading firm can set limits at every level of the firm, both for trading and withdrawals.

Catering specifically to institutional clients means that we also have a heavy focus on compliance . The New York Attorney General recently issued a report highlighting a number of concerns regarding crypto trading platforms, but these concerns are issues that we’ve already worked to address because of this focus on regulation.

And finally, it means having really solid operational support. We’re looking to be successful with 100 clients rather than one million customers, which means that we can offer much better support compared to the other platforms out there. Clients can actually get through to us on the phone.

P&L: You’re talking about “institutional” clients here, that’s a pretty broad categorization – who specifically are you targeting as clients? It seems unlikely that pension or endowment funds will be rushing to allocate to cryptoassets any time soon…

EW: You’re absolutely right, “institutional” is such a loose term. In terms of the adoption cycle, what we’re seeing is that prop trading firms are very active in the crypto space, they’ve jumped in pretty heavily. Family offices are starting to get involved and the point where we’re at right now is that hedge funds are starting to move into this space as well, and I’m not talking about small crypto-specific hedge funds, but actually large hedge funds that haven’t traded these assets before. After these groups, asset managers will probably be the next segment to become active in crypto trading and then pension funds and similar types of funds will be the last to come in.

So right now our goal is to offer the prop shops and family offices new trading opportunities with better technology and reduced operational risk, and then also to continue to bring in these groups that have so far been sitting on the sidelines of this. So that’s what we mean by institutional adoption.

P&L: At this point in time, what do these institutional players really care about when trading on a crypto platform. For example, is latency an issue at this point?

EW: It really depends on who you’re talking to. A lot of the time what prop shops are really looking for is solid APIs with proper documentation many of the crypto platforms out there change the API spec all the time and don’t have the proper documentation, which means that the prop shops spend a huge amount of time actually not being able to trade. And then there’s the stability issue, if these firms are trading and a platform goes down for a few hours, they might have huge open positions and not know their exposure. That’s happened a few times on other platforms and it’s something that people are starting to get really concerned with, especially given the volatility that we’re seeing in the crypto space right now.

We are starting to talk about latency, but it’s really not at the forefront of the discussions right now, that’s not the competitive edge for hedge funds and prop groups. They’re making enough money from arbitrage trades or simply market making both sides, they don’t need to be super quick. What they’re concerned about is: how do I mitigate the risk? They’re really worried about operational risk factors, which is what we’re trying to address.

And it’s worth pointing out that as this market evolves, these firms will want different things. The winners of yesterday are not the winners of today, you only have to look at the changes that have taken place in terms of who the top 10 crypto exchanges are to see evidence of that. So, you have to continue to innovate to remain competitive.

P&L: Is the current fragmentation of the liquidity landscape unsustainable then? FX is a very fragmented market with lots of different liquidity pools and, even though many industry experts keep predicting consolidation, if anything, more platforms keep appearing. Will the crypto space follow a similar pattern, or will liquidity coalesce around a few venues?

EW: An important difference with FX is the prime brokerage model. This model means that liquidity is more capital efficient firms can trade on 10 different platforms without having to actually post assets at each one. By contrast, in the crypto space you have to hold money at each venue, which is capital inefficient, and firms get to the point where they literally cannot onboard to another platform. So, although more new crypto platforms will appear, I think that the net aggregate amount will stay roughly the same, unless some sort of prime brokerage model is introduced to help improve this issue of capital efficiency.

P&L: You mentioned the New York AG report that just came out. That report highlighted concerns that certain crypto platforms might suffer from potential conflicts of interest, have yet to implement serious efforts to impede abusive trading activity, and provide customer fund protections that are either limited or illusory. What are your thoughts on this?

EW: Well, I can’t speak to what other platforms are doing, but these are all issues that we addressed from the very outset with our platform.

So for starters, we don't trade cryptoassets as a company and all of our employees are banned from trading them too. Our goal is to be impartial, and this extends to the tokens that we list on our platform.

With regards to detecting abusive trading activity, we built our platform from the very start to have automated alerts and we also have full time surveillance professionals who monitor all our markets and have previously worked extensively in other markets doing the same thing. People talk a lot about automated alerts, but they trigger a lot of false positives. What we have at SeedCX is an awareness and understanding of the market coupled with a deep awareness of manipulative practices that has been honed looking at other markets for years. Having this in place has allowed us to be confident in our ability to deter manipulative practices, but also to detect and then enforce action against people who engage in such practices.

And finally, we do an independent audit and have on-chain wallets for every single one of our customers so that they can independently verify the holdings.

P&L: Looking ahead, what are the next steps for building out the business now that you’ve secured this investment?

EW: Well it’s important to have the right people and that’s why we’ve made a number of key hires recently. John Hart, who was previously managing director of technology engineering for the CME Group, has just joined us as chief information officer, and Sam Tegel, who was previously head of liquidity at Jump Trading, has joined as our chief strategy officer. So now we have the core leadership team in place and we’ll be looking to buttress that with some additional hires going forward.

We’re also going to look at introducing more to the platform. Our goal is at the beginning of next year, subject to regulatory approval, to launch physically settled forward contracts as well. So the pipeline is really to broaden the number of assets on our platform both in terms of fiat and in cryptos, which means not just posting USD pairs but euro, Japanese yen and British pound pairs and then offering an expanded product range in terms of derivatives.