Cryptocurrency’s recent turmoil has not reduced the appetite of institutional players to increase their exposure to this asset class. Despite the sharp decrease in total value of coins and tokens, from a peak of nearly $3 Trillion to under $1.5 Trillion, the infrastructure of Crypto trading is now being built and new funds are being committed. Markets are evolving from being primarily retail-driven to now, institutionally focused. Trading technologies must adapt to this new world of diverse trading strategies, such as; long, market-making, arbitrage, delta-one (with the emergence of ETFs).
Crypto trading is the closest to FX Trading, but it also has distinct differences. The main reason is the fact that Crypto, as well as FX is about a relative price between the crypto (or the currency) and USD. This is an asset class, with a low (to near non-existent) level of regulatory framework, a plethora of players and participants, and an incredible level of innovation.
The below table review the similarities and differences of each market and supporting technologies.
| Topic | Similarity | Difference |
|---|---|---|
| Market organization and liquidity | Crypto is a continuous 24/7 market, versus a 24/6 for FX trading. The 4 main coins / tokens / stablecoins, e.g. BTC, ETH etc. represent more than 90% of the daily trading volume. The same is seen with major FX pairs (USDEUR, USDJPY, etc). Another similarity is the fragmentation of liquidity in both asset classes. Liquidity is spread across different pools and liquidity providers, which requires intelligent technology to execute against. | Cryptos are traded on 500+ exchanges, all over the world, with Asia (and Tokyo) having a prime position. These exchanges provide market making / liquidity provisioning schemes, but liquidity is often scarce in most of these exchanges. In FX Trading Liquidity Providers (LPs) are dominated by banks, providing an abundance of liquidity. New coins / tokens are emitted on a weekly/monthly basis (often called APE coins), with little liquidity. So deploying a trading strategy is quasi-impossible to lesser coins. In FX the non-major pairs are currencies tied to a country, with the liquidity often a function of the country's external trade and other global influences. The top 4 exchanges have the majority of the daily volume, with Binance ahead of the rest of the pack, with approx. 40% of the daily volume. In FX, despite fewer counterparties and venues, the overall availability of liquidity is much better distributed across them. All Crypto exchanges provide a taking and making fee schemes that favour bigger market makers capable of bringing more liquidity. Finally, Crypto has worked on a blank sheet in terms of the trading workflow. For instance, trades are immediately settled, and there is no T+1 (or T+n) settlement procedure, and therefore, no derived risk. |
| Derivatives and risk | Crypto is fast adopting derivatives, with Futures being the de facto derivatives. The leverage coming from Futures products is very suited to the institutional participants. Options trading volume is very small, despite new specialised exchanges. Option trading in FX is also relatively small compared to FWD/NDFs, and Swaps. | Most Crypto-exchanges have a real-time, mark-to-market type of margin / risk management, with automated liquidation. For FX Spot and Derivatives, trading is based on credit provided by LPs/Banks (bilateral, or via prime brokers), which is often based on a client-liquidity providers relationship. For FX exchange-driven contracts, including Futures, margins are calculated on a daily basis and liquidation happens in an non-automated fashion. The 24/7 risk management and the automated liquidation are an innovation, but also increase market volatility as leveraged positions are offloaded by the exchanges. This rapidly amplifies the price movements. Crypto exchanges entering traditional markets are bringing these behaviour changes, creating questions from market participants. For instance, the attempt by FTX to move into the Chicago Futures market has raised the alarms in the Futures industry, particularly farmers who are reliant on Commodities and Agriculture Futures to finance and risk-manage their business. |
| Trading technologies | As stated above, the biggest similarity is the fact that both Crypto and FX are based around a trading pair, i.e. Coin versus USD, or Currency versus USD. Fragmentation is also a common feature for both asset classes. So a set of technologies must be devised to manage multi-listing (see Smart Order Routing). | Crypto exchanges are Order-driven (i.e. an Order book, with a central matching engine), whilst in FX, prices are quoted by the LPs via either ESP (streaming, mostly for Spots for major currencies) or RFQ (request for quote/price). Fragmentation in Crypto is different because of the high geographic distribution of exchanges, located often in Asia (e.g. Tokyo, HK, Singapore) but also in many low-taxation/regulatory jurisdictions. This creates a latency consideration for a multi-listed trading strategy. For instance, a coin multi-listed on two exchanges in both Tokyo and in the Bahamas will be hundreds of milliseconds away from each other. In FX, three cities - i.e. Tokyo, London and New York dominate, and trading migrates from Tokyo, to London and NYC, with minimal latency arbitrage opportunities. The degree of concentration is even higher as each city is based in one big data center, where most matching engines and participants are located. Today most crypto exchanges operate their matching engine in the Cloud. This means that the most efficient trading technology deployment is to be in the same Cloud data center as one of the big four exchanges. These exchanges are new entities, which have seen a massive growth in the past two years. As a direct consequence, the matching engines are far from providing the same performance attained by the more mature asset classes. In general, they operate in tens’ of milliseconds versus sub-millisecond for the FX world. |
| SOR and Execution algos | Multi-listings require Smart Order Routing (SORs). There is already a very advanced and mature SOR technology in FX, with no limit to the availability of credit. Prime brokers and the high degree of trust between participants create a highly liquid, harmonious fragmentation for participants. | Even if all coins are the same, liquidity across exchanges is not fungible requiring cash as an intermediary. Wallets are a means to do this, but it is not well adapted to a high volume trading. SOR intelligence can be used to balance credit or prefund executions through volume predictions. This reduced execution risk enables better access to markets. Execution algos (e.g. TWAP) are only recently becoming a new tool considered in Crypto. |
The Crypto and digital asset market is very analogous to the heyday of the FX trading world, but with any new market the technology, regulatory and participant challenges are unique. For any TradFi vendor it is critical to approach these new markets with an open mind to innovation and not simply try and solve new problems with old designs.
On the other hand, the new providers launching in the Crypto space cannot ignore the valuable technology lessons that have been learned through investment and suffering over the last decade in TradFi.
Arrogance is the biggest impediment to technology growth and by learning and adapting the best multi- cross- asset trading solutions will evolve.
At Quod we believe firmly that our platform’s fresh approach to Crypto, as well as our long history in TradFi, provides exactly this perspective and we look towards the growth of this space with keen interest and excitement.
Visit e-forex.net to find out more about Quod’s take on Crypto and FX trading technology comparison.
Learn more about Quod’s Cryptocurrency O/EMS Solution.
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About Quod Financial
Quod Financial is a multi-asset OMS/EMS trading technology provider focused on automation and innovation – specialising in software and services such as Algorithmic Trading, Smart Order Routing, and Internalisation of Liquidity. Quod leverages the use of its data-driven architecture to support the demands of e-trading markets by combining AI/ML-enabled decision-making tools and dynamic market access with a non-disruptive approach to deployment. For more information visit: www.quodfinancial.com
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