Devexperts hosted a webinar on how to deliver crypto trades to retail investors as brokers increasingly seek to meet customer demand. The session explored the options for decision makers to inject this asset class into their offering from a technological, regulatory and technical point of view.
The webinar moderated by Nikolai Isayev, Editor-in-Chief of FinanceFeeds, began by introducing the three participants, Jon Light, VP of Trading Solutions at Devexperts, Henry Price, Quant & Digital Assets Specialist at GCEX, John Willock, Board Advisor, Division of market data at dxFeed.
The first question – why are crypto assets so technologically different? – was addressed to Jon Light, who explained that the difference is in the origins: the first crypto exchanges were initially designed to trade fantastic playing cards.
This means that early sites weren’t built on great fintech, from standards to security, to testing, nor was there experience gained in other financial markets and rules.
For example, Mt. Gox – the largest market share exchange in 2013, which filed for bankruptcy a year later after a massive hack – was created to trade Magic The Gathering cards.
Although the platform was adopted for crypto, it lacked the technical capability, resulting in huge transaction delays and security concerns.
So, back then, platforms were built without the experience, resources, and proper funding to create robust technology for financial markets. But even now in 2021, every now and then there are issues with some of the larger cryptocurrency exchanges, let alone the small and unregulated ones.
Enter Devexperts, a renowned provider of financial software for brokerage houses, exchanges and wealth management companies. The company has already developed a few cryptocurrency exchange platforms from scratch and consulted a dozen startups.
As Devexperts continue to experience high demand for software to trade digital assets, they have brought crypto technology experts together in one place to share knowledge and educate the public.
Below you’ll find out why Devexperts, together with market data affiliate dxFeed and liquidity partner GCEX, is uniquely placed to help brokers looking to launch a crypto offering.
A stable, secure, and scalable retail offering requires a simple protocol, such as FIX, and reliable data flow, especially if the broker is running a b-book.
On this topic, John Willock of dxFeed detailed the liquidity issues plaguing the digital asset space, including accusations of tampering with trading volumes in unregulated venues.
This poses challenges in terms of the quality of the data and its source. It is therefore essential that brokers partner with reliable data providers, for strategic and regulatory reasons, but also for the most basic criteria such as “are these volumes true or not?” “.
Mr Willock reminded attendees that volumes are used to rank crypto exchanges, but are a poor metric for measuring liquidity on their own. There is a lot of other data that needs to be looked at like book depth and quality of quotes rather than post trade.
Nikolai Isayev of FinanceFeeds then asked Henry Price of GCEX what types of offers brokers should consider from a settlement perspective.
While perpetual swaps are traded among peers, Mr. Price has mainly focused on CFDs and spot products as the broker is often a market maker. Brokers are more used to CFDs, which are MiFID II instruments and companies are licensed to trade them.
The UK, however, has banned crypto CFDs for retail investors, but has launched a digital asset registry, where companies can apply for a specific license to offer spot crypto exchanges.
Mr Price added that each blockchain has different requirements, with some technically and regulatory easier to provide when it comes to custody than others. This has a direct effect on the number of instruments available for trading.
When it comes to crypto CFD products, many of them can be hedged with 1: 5 leverage, but 1:10 might be too aggressive an approach for such volatile products.
The digital asset space is also known for its disruptive events such as hard forks (when blockchain architects decide on an upgrade that results in a new version of the blockchain in the market) and airdrops (when tokens are added to a portfolio in proportion to its holdings).
GCEX, one of Devexperts’ liquidity partners, manages hard forks by refraining from settling for a few hours while the chains are in motion due to settlement uncertainty.
The risk with airdrops depends on the product: whether spot or CFD. It is convenient to own the underlying asset. This means that, if you hold the place, you will get the reward. However, if you have a CFD position overnight it could be quite problematic, Mr Price said, referring to the risks of leveraged positions during such an event.
These types of events have been quite a challenge over the years, but custodians and LPs have become much better at educating clients about calendar dates, risks involved, and precautions to be taken.
John Willock of dxFeed explained that events like halves, airdrops and hard forks boil down to trading information. “This systematic information is easier to understand but there is no standardized format,” he continued, adding that some publish this information on blogs, others on Twitter or their website. “It takes extra work.”
Mr Willock also warned of the risks of airdrops and hard forks, as holders may have to expose their keys to new software to recover assets. This is a whole new layer of complexity not found in the dividend payout of traditional securities.
Returning to Jon Light, the vice president of trading solutions at Devexperts recalled that the maturing of preservation solutions, with cold storage, rigorous compliance standards and insurance policies, was the main reason for the institutional adoption that we have seen in recent years.
It seems inevitable that brokers will start looking for custodians to offer crypto deposits and withdrawals to meet demand and there are plenty of options.
When it comes to compliance overheads, custodians are best placed to help brokers as long as they have their AML procedures in place, depending on the jurisdiction.
Liquidity is always a major challenge for brokers and for this reason, Henry Price of GCEX reiterated that to hedge low people should look at spreads, but also depth “because a lot of retail brokers are not places where prices are discovered but large entities, at the market – manufacturing level â.
So, how do you approach a crypto offer for retail investors? The main ingredients are deep liquidity, regulation and compliance, custody, payment rails, and a team that speaks your language or has a background in finance.
The short Q&A had Jon Light stating that the Devexperts encryption platform is built on top of their existing framework and can perfectly be routed to two or more different LPs.
When it comes to payment methods, the platform has its own API to process deposits and withdrawals and can connect to all kinds of providers and wallet custodians, and is able to add more to the demand.
Devexperts has a high throughput matching engine, so the platform is fully capable of handling 24/7 orders using a scalable multi-node system.
Devexperts offers a SaaS service and gives brokers the necessary tools to run their business and support the system. The liquidity partner, GCEX, is linked to four custodians and can offer secure trading of around 20 CFDs. Only ten are taken care of for on-site delivery.
Typically, most custodians offer one large account for each broker and all deposits go below, but a growing number of depositories are now offering sub-accounts, especially for regulatory reasons. In the United States, segregated accounts are a requirement.
dxFeed offers data analysis services on a stand-alone basis to a complete display solution including any type of graph visualization tool. The underlying analyzes typical of the traditional securities trading space can be replicated.
Many questions were answered during the webinar, but as this topic is inexhaustible, send us your question to discuss your unique challenge in person with the Devexperts Solutions Experts, here.