[ad_1]
David Weisberger is co-founder and CEO of CoinRoutes and a veteran of trading desk construction and financial technology companies. The opinions expressed in this article are his own and do not reflect the position of CoinDesk.
The following article was originally published in Institutional Crypto by CoinDesk, a free newsletter aimed at the institutional market, with news and views on crypto infrastructure delivered every Tuesday. Register here.
We have all seen armies of pioneers lurking around LinkedIn and Telegram to announce their access to buyers or sellers of bitcoins, as well as to hundreds of over-the-counter trading offices whose only trading method is to call the makers of the wholesale market. .
The irony of this situation is incredible, given that one of the most important goals of bitcoin and other cryptocurrencies is to "eliminate middlemen" and remove friction costs from the financial system. Today, however, the bitcoin trade is more in traditional finance, the costs of friction trading are much higher than for non-digital badets.
Before addressing the foolishness of the current structure of the crypto-trading market, it is important to note that I am a strong supporter of the potential of crypto to revolutionize capital markets, finally.
I've officially stated that the ability of the cryptography market structure to support global capital formation and trade will mean that all financial badets will be traded numerically.
My reasoning is based on the ability of cryptographic exchanges, serving customers around the world, to exchange the same badet against various currencies, crypto-currencies or stablecoins. This can potentially eliminate a wide variety of intermediaries in markets currently serving a geographic region and trading in one currency per instrument. That being said, the current market for over-the-counter crypto is littered with intermediaries who all extract their own commission.
Consider the following workflow diagram that represents a typical crypto transaction today:
In this example, the investor is "represented" by an introducer, who wins among five introducers who all speak to this investor. The winner contacts five OTC offices to "find liquidity" for his client. An office is chosen, which in turn contacts three market makers and chooses one for the trade.
The market maker then gives a price to the customer, after checking where he thinks he can negotiate the order; the transaction is made with the client and the market maker exits the position via an exchange.
This model is of course quite inefficient. Paying an implicit commission or spread to four different counterparties makes little sense, but the worst is that each of the OTCs and market managers contacted is aware of the existence of the order. This, in turn, suggests that the market would evolve before the transaction is consumed, which would increase costs for the investor.
All is not lost, however, because there are legitimate options for investors who wish to trade effectively. For example, the most sophisticated large-scale wholesale manufacturers have developed excellent systems for trading between exchanges and other market makers. In addition, agent offices with intelligent order routing systems are in the process of being established. From an investor's point of view, however, it can be difficult to discern the real capabilities of each company. Investors are struggling to find the best trading desk that meets their needs.
My advice to investors is to ask the following questions when evaluating a trading company:
1. Does this negotiate against my order as "principal"? (Ie, should one take the other side of the trade by committing one's own capital?)
The answer is essential because it tells you immediately if you are facing an exclusive trading desk. If the answer is "yes", it is neither bad nor good, but it has important implications – it means that you probably negotiate without paying for an additional intermediary (good), but unless the counter has contacted you beforehand you should: exchange with them only if you need immediacy. In fact, immediate cash has a cost and you end up paying too much.
In addition, if you contact multiple offices to search for your transaction, you pbad a lot of information to the market and the offices pre-cover often before consuming the transaction. This is very expensive, because it amounts to a legal process that will change the price against you.
If, however, the pulpit you are talking about does not involve capital, it is neither good nor bad, depending on its process and relationships. If they act as an agent and have a "natural" counterpart in good faith to the transaction or if they have a sophisticated algorithmic trading platform, they can provide a substantial value. In the case of "natural" counterparties, however, be suspicious, as most of these cryptographic receivables tend to be false.
Algorithmic platforms designed for cryptography markets are generally the most cost-effective trading solution. Again, make sure that the desk with which you speak also speaks for itself. If they do, ask them in writing about their procedures preventing them from negotiating before or along with your order. If they do not provide this, suppose that they will use your business to make commercial profits.
2. How and where does the company obtain cash and what does it charge for it? Is this charge reflected in the form of commission or price increase / discount?
It is also vital to ask where your OTC counter is. S & # 39; it relies exclusively on other OTC officesfind another. Why do you need an intermediary office to talk to companies who will take your call themselves? This means that you pay an extra office for no reason. In addition, you will lose control of your order. Unfortunately, such offices are very common and probably make up the bulk of the business universe. If, however, they have a robust platform with access to a combination of OTC offices and exchanges, the next question becomes central.
3. What e-business tools does the company use and how do they interact with "public" markets?
If your OTC office uses a combination of unique desktop interfaces or single exchange, be extremely suspicious.
It is almost impossible for an operator to simultaneously monitor all markets and calculate the optimal ordering parts to be sent to the markets throughout the life of the order. The answer you should be looking for is that the office has an algorithmic trading system with maximum connectivity and access to data.
This statement is taken for granted in other badet clbades, but not in encryption. Now that such crypto trading tools exist, it's time for crypto investors to take notice and ask their agents to use them.
In conclusion, it is time for investors in the cryptography markets to focus on best execution, which will help them achieve superior returns while improving the market structure.
This is important because such an improvement will help attract reluctant institutional investors, wary of rapid price movements and the difficulty of discerning the price of liquidity.
Bitcoin broken on the graph via Shutterstock
Source link
