James Banister, CEO of Market Synergy, reflects on how the dynamism of the digital asset space reminds him of the FX industry of yesteryear and talks about how institutional-grade technology is changing these markets.
For those of you who weren’t around in the FX market during the ‘90s and early ‘00s, let me tell you that it was a hotbed of innovation. The electronic trading revolution was just beginning and all sorts of innovative ideas and products were coming to market to address various challenges facing the industry. And today, I see that same energy and drive to solve industry problems in the digital asset space.
But while the spirit and ethos of the digital asset markets reminds me of the evolving electronic marketplace of FX 25 years ago, there are some crucial differences to be aware of in order to understand how this nascent asset class will continue to develop.
One major difference is that the professional traders in the digital asset space tend to come from technology backgrounds, not trading ones like they did in FX.
What does this mean in practice?
It means that these professional traders are incredibly adept at developing and implementing agile technology solutions that enable them to trade digital assets in an efficient way at relatively low cost. Whereas previously, the FX industry was working to shift existing markets onto electronic platforms to make trading more efficient, the firms trading digital assets today already have all the trading technology they need and are just bringing it to bear on this new market. This is significant because it means there is a more level playing field today for firms to enter this market and begin trading on the major digital asset exchanges quickly.
But because these trading firms are tech-savvy they have a number of requirements that simply have to be met before they will begin trading in any market. They need to know that there is a professional connectivity-based infrastructure that is efficiently managed in the right data centre. It is critical for them that the right technology setup is in place with, for example FIX interface to hand, with the resources and experience to be able to roll out connectivity to their clients.
Delivering this connectivity requires a lot of co-ordination, but the advantage that we have at Market Synergy – a specialist institutional connectivity provider – is that we’ve been providing this in the FX market for many years.
This takes significant investment and planning, which is why digital asset exchanges that truly want to cater to this professional client segment, such as our partner Bitfinex, a leading digital asset trading platform, have to be fully committed to put all this infrastructure together. Bitfinex provides access to peer-to-peer financing, an OTC market and financed trading for a wide selection of digital assets. Bitfinex’s strategy focuses on providing unparalleled support, tools, and innovation for professional traders and liquidity providers around the world.
Building Out the Right Infrastructure
Let me give you an example of one of the problems facing institutional market participants that want to trade digital assets.
Digital asset exchanges have traditionally relied upon cloud infrastructure. The advantage of using these services such as AWS or Google Cloud is that it is much easier to build on top of that type of pre-established infrastructure, but there are also numerous downsides.
You don’t have any precise idea of where the servers that you are renting are located or whether the configuration switches and firewalls are in place. You also don’t know how they are connected to the servers and their load or specifications and you don’t know the average length of the networking cables. Essentially, using the cloud means that you’re left with an unpredictable infrastructure where both the server that you are renting and the networking equipment is either not predictable or unknown to you. Meanwhile, a lot of the cloud offerings provide networking or shared discs that have unpredictable performance. In addition, the throughput can be choked, depending upon how much is being currently used and how frequently it is being used.
All of this is, clearly, a major problem for today’s professional trading firms.
By contrast, Bitfinex has built its own trading infrastructure so that it knows exactly the performance of each server, each disk, the length of the cables, the connection to the switches and firewall configurations. Armed with this knowledge and exact information, Bitfinex is able to predict and offer constant, reliable and optimised latency for its growing user base.
As an exchange founded in 2012, Bitfinex has been at the forefront of technological innovation since the very inception of the digital asset space. The exchange has stood the test of time in a highly disruptive and dynamic, technology-driven marketplace. As I said, delivering robust trading solutions in this space is extremely complex and requires investment and technical expertise. But it is absolutely necessary in order to afford professional trading firms the performance and security that they require.
Of course, technology alone can’t remove every barrier that is preventing many institutional players from trading crypto assets. The custody of digital assets continues to be a challenge, something that perhaps hasn’t necessarily been recognised as it should in some quarters.
I think that a professional custody solution offering new innovative ways of handling digital assets for major crypto exchanges will open the door to increased confidence and interest in the digital asset sector. This will enable firms to trade these assets between different venues, with all their assets sitting on a segregated electronic ledger.
And the good news on this front is that we are now seeing interesting, innovative start-ups in the digital asset custody sector and this is also resulting in major firms that are household names within the financial services industry moving towards offering such solutions. This will help to bring more interested parties into the sector, knowing all the key building blocks are falling into place with trusted vendors.
The other major barrier towards more traditional financial services firms trading digital assets is the lack of regulation in this market. There is understandably some fear among institutional investors operating in a market that is unknown to them, and this is only exacerbated when there aren’t clear rules in place to protect them. To give just one example, digital asset exchanges don’t have to have their matching engine audited by a third party that makes sure that they are following the same security, quality and fairness standards that are required by traditional exchanges.
Again, the good news here is that it looks as if the major financial centres are moving towards stricter regulations and so it is only a matter of time until we have these rules of the road in place. And until then, more institutional market participants will continue to become active in the digital asset space because they recognise that with this high risk comes a potentially high reward. Because while the FX market has generally been subdued for a number of years now, digital assets continue to be volatile and there’s still plenty of alpha to be extracted from these markets.
So I think that there are certainly still questions being asked in the digital asset space, but the solutions are now starting to appear, and they are starting to appear pretty rapidly.
I remember when I was working at Citi in the early ‘90s, we would talk to clients about the benefits of electronic trading and explain how much more efficient electronic trading off real–time prices could be. This then allowed more concentration on higher value products to be up-sold to clients. Removing small, inefficient trades allowed much more efficient pricing for the customer. In that respect, I think that we are seeing something similar here and the timeline to finding solutions is much faster because the people getting involved in this market are technologically very sophisticated.
So this is a market that is evolving very quickly and I think that the foundations put in place over the past couple of years are really going to start coming together in 2020 and 2021. The technology is now available to offer professional traders the kind of experience that they are used to in more established financial markets. I think that a combination of time and innovation will quickly remove the remaining barriers preventing increased participation in the digital assets markets.
The period of innovation in electronic FX 25-plus years ago significantly changed and enhanced the industry, making it more efficient and defining how it grew. It offered extraordinary opportunities for firms to benefit from. In this regard, the digital assets market is likely to prove very similar and is only just starting to get into its stride.
This content was sponsored by Market Synergy.