Institutional investors and trading firms require platforms with sophisticated front-to-back office workflows. What are the challenges of integrating cryptos into their existing and complex infrastructures?
In our experience, trading firms are looking for a trading platform that can bridge the gap between traditional assets and cryptocurrencies. They want to be able to trade all asset classes through the same platform. The platform needs the flexibility to allow the firm to use the same workflows where appropriate while designing and managing different workflows that are unique to each asset class, and this extends to crypto and digital assets.
Once this foundation stone is in place, firms can begin to build key capabilities for crypto trading, many of which mirror the technology requirements for trading in more traditional assets like fixed-income, foreign exchange or equities.
What issues need to be considered by institutions when evaluating the build versus buy argument with respect to acquiring crypto platforms?
After a flat 2018 in terms of revenues and profit – and with MiFID II behind them – trading firms are focusing on cost. Given these factors, firms are questioning their approach to trading infrastructure development and exploring outsourcing at least some elements of the technology stack. As they look to add cryptocurrency to their product mix, trading firms can turn to trusted technology partners for components on which to base their trading platforms. Having ‘bought’ these ready-made items allowing them to inject their own intellectual property, they can build differentiating capabilities on top at a more competitive price than building in-house. One key consideration is delivery model. By tapping into SaaS or managed service delivery, firms can implement new capabilities rapidly and at reduced cost, giving them the flexibility to adapt to changing market requirements, which is critical in the cryptocurrency space.
What factors should influence institutions in their choice of which trading platform technology to build their crypto business on?
Experience of other asset markets is essential. At smartTrade, we have applied platform attributes from other market solutions to cryptocurrency trading, among them security, stability, performance and scalability. For clients, this creates consistency across their crypto and traditional market activities, reducing cost and enabling rapid time-to-market.
Recent events have underlined the importance of data security and transparency. Uniquely among its peers, smartTrade has full compliance with the Security Operations & Control 2 (SOC 2) regulation, which governs security of client data and recorded market activities. Compliance requires an annual audit examination, which reviews our data Security, Availability, Processing Integrity, Confidentiality capabilities.
The other key factor is transparency around costs. With our flat fee (vs. volume-based fee) model, clients can reduce and predict their trading costs, using a fixed price, without brokerage fees, resulting in higher profits.
How can institutions reduce their time to market when introducing cryptos and what technology bottlenecks can impact on this process and so may need to be addressed?
The surest way of reducing time to market is by exploiting commonalities with traditional asset classes. This points to the need to work with a technology partner with experience in other markets and there are several areas where this crossover can expedite introducing cryptos to the product mix. For example, connectivity to the broad and growing range of cryptocurrency liquidity providers requires experience in dealing with fragmented markets. Hedging and risk management is another area where existing processes can be co-opted for rapid deployment.
Closed trading platforms pose an obstacle to exploiting these kinds of commonalities. What is needed is an open platform with rich APIs that can handle fast integration of crypto wallets and the addition of unique proprietary capabilities.
What advantages will institutional firms looking to enter the crypto market get from working with well established platform and technology providers with proven experience in the FX trading space?
As an established provider of trading technology solutions for the FX marketplace, smartTrade has been active in helping innovators in the cryptocurrency and digital securities markets. We have worked with clients to introduce accepted capabilities and processes from established markets to the crypto segments with great success.
Our clients have benefited from the ability to rapidly deploy market-accepted capabilities at competitive prices. For example, we have helped customers access multiple liquidity providers and hedge positions across multiple assets, including crypto.
smartTrade also supports such functions as order aggregation and execution, smart order routing (SOR), pricing distribution, order management and analytics. Clients can additionally leverage our hosting and colocation capabilities as well as our real-time risk management tools.
In what ways can technology providers help institutional trading firms to differentiate themselves when it comes to cryptocurrency trading?
Beyond the core capabilities described above, smartTrade has been working with clients on a number of more specialised initiatives in the cryptocurrency space. We have helped clients of our LiquidityFX foreign exchange platform add crypto to their offerings, for example. We have helped liquidity providers to white-label our distribution capabilities. And we have used our cross asset trading platform and matching engine to create internal and external markets for trading venues. smartTrade’s strong capabilities in FX and crypto assets, combined with its fast access to more than 120 Liquidity Providers, allow our clients to create synthetic cross rates (e.g., BTC/KRW from USD/KRW and BTC/USD). These new instruments enable our clients to reduce their transaction costs, benefit from potential arbitrage opportunities and give them a competitive advantage.
Elsewhere, we continue to work with customers on specific projects. These include, for example, the ability to capture and send post-trade data onto private distributed ledgers that can support an immutable audit trail of transaction records for analytical and regulatory purposes.
How can technology solutions help institutional players to mitigate many of the biggest risks involved with cryptocurrency trading?
The smartTrade trading platform has built-in protections, common in other markets, that can be applied to cryptocurrency markets. For example, it offers fully integrated real time inventory credit check to venues combined with SOR to ensure efficient executions.
It features the kind of pre-trade risk controls used in traditional markets to ensure counterparties’ credit limits aren’t breached, for example. smartTrade has also addressed key cryptocurrency market challenges such as aggregating fragmented crypto liquidity, price cleansing and mitigating liquidity mirages.