FIA Expo Panel Explores the Future of Crypto Market Structure

FIA Expo 2021 crypto market structure panel
Sarah Rudolph

Sarah Rudolph


The last panel of the day on the last day of Expo was surprisingly well attended – perhaps because it was about cryptocurrency, a topic that sprang up on many of the other Expo panels that were not even supposed to be discussing cryptocurrency.

An earlier panel had talked about crypto regulation; this last one, titled, “Crypto – Market Structure” explored market structure issues that affect the crypto world, such as hyperfragmentation, the immaturity of the market relative to traditional financial products, and the absence of prime brokers. 

The rapid innovation in crypto has brought new ways of offering leverage to retail participants in the markets. Leverage used to be reserved more for institutions, and there was a “big untapped ball of customers out there” who had trouble gaining access to that feature of trading, said Luke Hoersten, the CEO of Bitnomial. 

The 24/7 nature of the market is a challenge, said David Nuelle, the managing director of Hehmeyer Nortide. “Crypto never sleeps,” he said. “It trades 24/7.”  Nuelle said Hehmeyer Nortide addressed that by writing its own data structure, including a data back end and a way to look at exposure. They also hired a lot more people. 

When the futures market came on board with crypto a few years ago it was an entirely new asset class. David Rosu, head of futures electronic trading Americas at Barclays, said, “We went from, ‘Do we get involved?’ to ‘How and when do we get involved?’ very rapidly,” he said. And the company asked themselves what was their reputational risk. 

Operations have become key “because you have to understand both your open position and also your balance,” said Renata Szkoda, director at Galaxy Digital. She added that the 24/7 nature of the markets is a challenge but also an opportunity, because it makes the markets so accessible. “It doesn’t matter if it’s a holiday,” she said. You can still trade somewhere.

Cryptocurrency started as a retail market and no infrastructure existed. “Our view is that in order for crypto to reach its potential, we have to plug into the traditional infrastructure and be able to trade crypto alongside other types of assets,” said Matt Trudeau, the COO of ErisX, “Now, a lot of the infrastructure has been built. We came a long way in a short period.”

One of the biggest challenges is the absence in these markets of the prime broker.  “The prime broker’s function is so critical to the rest of the market, and you become your own prime broker – and that’s a challenge,” Nuelle said. 

“Having a prime broker who is a regulated, trusted party would be helpful,” Szkoda said. 

“Because of the way the market evolved, crypto native firms in retail don’t necessarily appreciate settlement risk or lack of surveillance oversight,” Trudeau said. “But as markets evolve, people become more sophisticated. And they also lose money.”

ErisX is in the middle of being acquired by Cboe Global Markets, and Trudeau noted that for them it is now all about distribution.

“There’s a clearinghouse. There’s an exchange with surveillance and oversight, reliable market data APIs. Everything’s there now. So it’s about distribution and the players in this room who are accustomed to trading on regulated exchanges that have robust oversight,” he said, adding that the crypto market is “not the Wild West anymore. We are getting traditional players into the game.”

There is still a lot of education needed, especially for institutional investors, Szkoda said. Once people are educated, “we’ll transition into decentralized exchanges quickly.”

Questions around disintermediation in the crypto sphere have come up, but Trudeau said “disintermediating everything is a bit of a red herring.” ErisX is an intermediary-friendly market, he said. A bigger question is whether traditional players will be fast enough, he said. “The rules are all thrown away for the crypto people. They are willing to change the status quo. I’ve had to throw away a lot I took for granted to compete with these firms.”

There are offshore exchanges that are onboarding retail participants as direct clearing members, and it is tempting to think that maybe the market does not need intermediaries, a panelist said. “But I think another way of looking at that is we are centralizing all the risk into one entity.”

He said any strategy that doesn’t look at DeFi (Decentralized Finance) or blockchain as a coherent part of an investment profile is “doomed to fail.” 

“DeFi is Web 3.0 for finance,” he said. He added that the adoption of these technologies has happened faster than people thought it would, probably pushed on by the pandemic. “The ability to adapt will define the industry in the next five years.”

The Chicago Mercantile Exchange is now the largest exchange for bitcoin futures by open interest. The panel was asked if CME would be the model that works in five years, or if it would be DeFi. Most thought it would be a hybrid, and that there is still a need for centralized exchanges because “that’s where the highest fidelity price discovery can occur.” 

There is  a lot that falls under the DeFi label, Trudeau pointed out: exchanges, credit facilities, market makers, CLOBs, and bilateral trading, for example. “There is a variety of market structures – no one definitive structure,” he said. He added that DeFi is “a great solution for the collateralized lending business.”

With the recent launch of the first U.S. cryptocurrency-linked ETF, the ProShares Bitcoin Strategy ETF, many investors are hoping for an ETF that will track physical bitcoin as well. The panelists agreed, saying a physically backed crypto ETF would bring in new players and grow the market structure.

The panelists agreed that a “hybrid approach” will be the way of the future – one in which investors’ accounts will include some cryptocurrency products and some conventional products, and they will be able to trade both. There are still issues, regulatory and structural, that need to be solved, but the efficiency and accessibility of this technology is undeniable, the panel said.

Correction: An earlier version of this article attributed a quote to David Rosu which was actually said by David Nuelle. It has since been corrected. The quote was: “The prime broker’s function is so critical to the rest of the market, and you become your own prime broker – and that’s a challenge.” 


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