Michael, what attracted you about DMALINK and encouraged you to join the firm?
MI: The idea that got to me was the fact that two men were taking on the world of e-FX with everything on the line. FX is such a competitive market that no one dares to do things differently; broadly speaking, innovation has been quite stale. DMALINK was the first to bring the ‘no fee for LPs’ model to align our interests with clients, benchmarked execution is a feature that’s becoming requested more frequently by the funds, and so there are different angles we can take to help our clients—lastly, the lack of office politics. The absence of fear of being judged or ridiculed really changes the way you think and allows an individual to grow far more than in an environment where the status quo prevails. We can also see this working for our most recent hires through how they acted when they started vs. now. Everyone has (or should have!) ideas, but 80% never see the light of day given the insecurities an unhealthy work environment creates.
A few years have now passed since you joined the firm. Please give us some insight into how you feel things have progressed?
MI: Certainly. The market is different from five years ago. Many bank LPs we work with utilize the latest technologies to weed out bad behavior in the industry; we take that idea to the next level by further rewarding participants that continue to respect liquidity by providing skewed feeds, at base level or one-hand-sided. Our client footprint has grown thanks to our presence at leading trade shows. The sale cycle isn’t as much of a sale as it is fact-finding combined with helping people understand the inherent pros of trading on an ECN, specifically, one that differs by such a margin. The hardest part has always been scheduling the first conversation; persistence is key, and removing your ego to enable yourself to engage with new participants consistently is critical to successfully growing any business.
Have you met all your expectations for the business so far?
MI: In short, yes, but the long answer is the more interesting. The team articulated expectations, so there were no surprises or hidden daggers within the contract. This is a major part of why working within a team of like-minded people focused on the goal instead of their personal gain makes working much easier. We’ll all achieve our ‘personal’ goals if we can champion the challenges we set out to tackle in the FX and Digital asset space. Speaking for everyone on the team, we’ll never hire someone who doesn’t have a constant drive to do more. We’re still a small firm but are embarking on a huge mission within digital assets; we need people who can match our speed of execution, from high-level decisions to the basics of answering an email or phone call asap, to show our clients we’re there for them.
Let’s address two questions now to your colleague Michael Siwek, Co-Founder of both DMALINK® and DeFinity Markets. Please tell us more about your team and what the dynamics are between their key roles?
MS: The background of the core team is OTC derivatives structuring and sales (FX, Commodities, IR & Inflation), within UK investment banks and electronic trading within exchanges, namely NatWest Group (RBS), Lloyds Financial markets Barclays Investment Bank, NYSE and Deutsche Borse. We all have a strong affinity towards digital assets and have done since 2017, however, we all come from a TradFi background. Saying ‘having a good team is paramount’ is a near truism today, but the importance of this cannot be stressed enough. Our hiring goal is to find people that excel at different aspects of our business so that we can service clients in harmony.
Manu Choudhary joined us four years ago from Lloyds with over 18 years of experience managing teams focusing on the bank’s FX products. His global macro knowledge and understanding of FX options, rates, and spot helps us tailor the business to our client’s needs. The biggest strength is his ability to adapt to the new age and champion the concepts which are only emerging; He is one of the co-founders of DeFinity Markets which is the brainchild of years of combined lessons learned in the world of FX, coupled with a holistic understanding of the issues faced when trading digital assets, namely counterparty risk and credit intermediation.
Recently, the firm has grown its strategic advisory team. Please tell us about the selection process and advisory team’s remit, specifically Greg Myers, who joined about a year ago as senior regional adviser for EMEA.
MS: We were seeking to attract people who can use their experience as a business builder and accumulated knowledge base, specifically of the financial markets, to speed decision-making time, to market with proven solutions, and without the pain of trial and error. We were keen to attract talent to assist with the formulation and execution of the company’s overall strategic plan, including identifying market opportunities, assessing industry trends, and developing long-term growth strategies. To benefit existing and incoming shareholders, we look for agenda-free advice that is based on facts and real experiences. The management team appreciates that this intellectual honesty and experience can drive innovation and growth.
In terms of market analysis, we appreciate the value of in-depth research and analysis of the digital assets market, including cryptocurrencies, tokenized assets, and blockchain technologies. This involves evaluating market dynamics, competition, regulatory factors, and emerging trends that may impact the company’s business. As to business development, it is critical to attract advice around identifying and evaluating potential partnerships, collaborations, and acquisition opportunities that can help expand the company’s client base, increase trading volumes, and diversify revenue streams.”
So now a question for Greg. Why did you decide to join DMALINK as a strategic advisor?
GM: Having met and been impressed with the team’s ambitions and their foresight to understand the significance of strategy and that business objectives and challenges can be enhanced by expertise outside of their organization. With an existing strong FX trading venue and the ambition to move into the digital assets arena for institutions, it was important to look at the growth element and how to enhance the existing offering, extend it into new global FX opportunities, and lay the groundwork for the launch of our digital asset trading solution for financial oriented institutions. As a strategic advisor to a digital assets trading business for institutions, my remit would typically involve providing expert guidance and insights to the company’s leadership team in order to optimize their operations, enhance profitability, and achieve their business objectives. Regarding institutional client services, I advise the group on the development and enhancement of services specifically tailored for institutional clients, including trading solutions, custody services, liquidity management, and regulatory compliance frameworks. Assisting the team in terms of developing new revenue lines with robust planning and effective controls is key in my role. Performance Analysis has always been paramount to me in monitoring and evaluating the company’s performance metrics, key performance indicators (KPIs), and financial results. Identifying areas for improvement and working closely with the team to implement strategic initiatives. Overall, my role as a strategic advisor would be to provide valuable expertise and strategic direction to help the digital assets trading business optimise its’ operations, navigate industry challenges, and capitalize on opportunities for growth in the institutional space.
Michael Idzkowski if we could bring you in here again. What factors influenced the firms decision to move into the digital asset space?
MI: Digital assets, and to take a broader view, digitization and tokenization of the financial markets have already begun. We saw this from bond issuances from several large institutions, all the way up to exchanges already trading some form of digital assets. For us, it’s always a question of ‘What is the problem?’. We established four key considerations for institutional market participants: AML/KYC/KYT, counterparty risk, credit, and capital efficiencies. The other consideration we noticed was two distinctive client camps, the crypto natives and investment grade financial institutions, which are interested in participating but cannot due to the earlier highlighted reasons. This thought process instigated a chain of events that led us to where we are today.
Which client types does DeFinity cater to?
MI: There will be two cohorts of clients which will merge into one. First, we have the fully regulated, investment-grade financial institutions such as pension funds and asset managers who already have credit lines in place with various Prime Brokers who will utilize DeFinity as the springboard to enter the space. Through us, these institutions will face a global tier 1 credit intermediary.
This means, issues around counterparty risk, AML, and credit largely disappear. Here we’re talking about the large names who have been given remits but are still quite docile, given they cannot face sub-investment grade counterparties. The second client pool comprises pre-funded participants who we’d categorise as crypto natives. These counterparties will be prioritized for engaging with the investment-grade users when the two systems begin to merge.”
Coming back with a few more questions for Michael Siwek about Digital Assets. What were the challenges faced in creating digital asset solutions fit for investment-grade firms?
MS: In reality, there are too many to count! But the costs of establishing a new trading platform within the space were noticeable. Being largely self-funded means we must seriously consider our steps. From a time perspective, the other main consideration was drafting and agreeing of legal contracts between users, the DeFinity platform, and intermediaries. In terms of technical integration, FIX API connectors are plug-and-play yet require time for conformance. The number one challenge was creating a smooth fiat on/off ramp system, credit intermediation, and bringing a new concept to the market where exchanges are most present today yet bear many inefficiencies.
How do banks fit into your electronic digital assets trading ecosystem?
MS: Many counterparties have raised $50m+ to facilitate digital asset trading and failed. But the reason that most of these firms fail is because they see banks as competition; we do not. We see banks as being an integral part of our ecosystem. We believe that in order for digital asset trading to be embraced on a meaningful scale, banks can help to turn a trustless system into a trusted system. A number of digital asset offerings do not address any of the shortcomings of the current infrastructure. Our thought process has always been, how can we give access to spot crypto to fund managers that are unable to face counterparties that do not have a credit rating, which is why we created our novel credit intermediation solution, in which banks will play an ever-increasing role.
What are the characteristics that set DeFinity apart from traditional crypto exchanges?
MS: We do not make any cross-border payments; we are a venue where buyers and sellers meet anonymously to trade assets. What makes us unique and very different from an exchange is that we are not principal to the trades; we have direct market makers and direct liquidity consumers. We have completely separated trade execution from custody of both fiat and crypto.
It seems that today’s digital assets credit models carry increased opportunity costs. Are there any solutions?
MS: Digital assets are highly volatile, creating opportunities and risks. Institutions face the challenge of timing their trades to capture market movements. Pre-funding means missing out on potential gains or losses during the waiting period, resulting in opportunity costs for institutional traders. Our solution enables users to net longs/shorts intraday dynamically, therefore increasing traders chances to capitalise on intraday price movements.”
We can’t complete this article without a few final words from Manu Choudhary. Michael has given us his reason but why did you decide to join the firm?
MC: The key idea for me was the opportunity to change the landscape of digital assets. I saw time and time again how inefficient that market is and the comparisons to the world of FX in the late 90s and early 2000s; with that in mind, we got to work on creating a solution. This led us down a 24-month rabbit hole of legal agreements to finally get us to where we are today with DeFinity Markets. This has profound implications for the market; counterparty risk decreases drastically, and credit intermediation is made simple via existing credit arrangements users can rely on. Our system introduces a new cohort of participants who previously could not participate in the market given the absence of an investment grade solution.
Where will the focus of the business be over the next two years or so?
MC: The focus remains on the FX ECN including the inventory management for FIs through passive interest matching of orders in our dark pool setup; however, we’ve had a huge amount of inquiries about digital assets, so with the launch of DeFinity Markets, we’ll allocate some of our resources to that cause. We want to leverage our FX business network to fast-track the expansion of our digital asset ECN. The feedback we had from pension funds and traditional buy-side was that they want to participate and have been given mandates, but they need help facing the counterparties currently involved in the space. We have completely separated trade execution from custody of fiat and digital assets. For fiat custody, we have partnered with one of the largest European investment banks, which will hold cash or cash equivalents in ringfenced accounts; this will then permit the clients to trade digital assets on our platform without the need to pre-fund each trade. We are agnostic regarding the custody of digital assets; clients can either self-custody using Fireblocks or use an accredited custodian. In the scenario of a default or trade failure, we have full legal recourse to ensure that the other side of the trade is always made whole, and by doing this, we ensure that we minimise counterparty and credit risk as much as possible.
In a nutshell how would you describe the group’s ultimate electronic trading mission?
MC: As we combine trading activities across cash foreign exchange, precious metals, and digital assets, users across these assets will benefit from seamless netting across the DMALINK and DeFinity platforms transacting with each other using one overarching legal agreement underpinned by FIX API connectivity. Netting positions across counterparties will help drive capital efficiencies and reduce the requirement for over-allocation of cash. Our multi-custody middleware TechStack sits in between the application and operating layer, enabling operability between multiple custodians.
Combining knowledge and IP across the group, our users benefit from an all-encompassing solution across traditional finance and digital assets.