Markets
Traders say cryptocurrency exchanges are targeting major brokers, which is a step back for market efficiency
As the world’s largest cryptocurrency exchanges take aim at brokerage firms that bundled their clients to take advantage of lower trading fees, some market participants are warning that the move could hurt markets.
Exchanges say they are taking these steps to promote a level playing field for their users, while also ensuring they have transparency into the identities of prime brokers’ clients. Others see it as a step backwards, at least from the perspective of creating more efficient markets.
Cryptocurrency markets were created for retail clients, first and foremost, which is why they differ so much from traditional finance. In mature markets, prime brokers offer institutions the equivalent of a simple bank account, behind which an army of intermediaries safely store money and assets and facilitate lightning-fast trading across a variety of venues. Prime brokers also provide credit, allowing traders to shuffle and change positions, with everything netted and settled a day or two later.
Cryptocurrencies’ ability to disintermediate and provide real-time settlement via blockchain means that large participants with multiple simultaneous trades must fund all of their positions in advance on a group of large, vertically integrated exchanges. Prime brokers solve this funding problem through their lending and financing component, notes George Zarya, CEO of How mucha top-notch brokerage firm that services clients in the cryptocurrency industry.
By preventing brokers from accessing lower fees, exchanges may (perhaps inadvertently, perhaps not) make the cryptocurrency market less attractive to them.
“Exchanges have decided that intermediaries are not necessary. They can also provide loans, right?” Zarya said in an interview. “But they can only provide loans for positions that are based on their exchange. They can’t provide portfolio margin, which includes your positions in the entire market. So, essentially, we’re moving towards less capital-efficient markets.”
Big cryptocurrency exchanges are moving toward “liquidity capture,” said Brendan Callan, CEO of Tradu, a recently launched cryptocurrency exchange owned by investment banking group Jeffries. In other words, they’re creating a captive audience model, where trading volume increases because a user has to continually move in and out of positions on that exchange.
The result is a discrepancy in bid prices on highly popular and liquid pairs like BTC/USDT from one exchange to another, Callan said. The discrepancies between exchanges would seem “crazy” to a conventional currency trader, he said, because liquidity providers are all free to access a prime brokerage account behind the scenes, so they can make markets on any other exchange.
“It means you don’t have this friction of counterparty risk thresholds on all these exchanges. But the crypto exchanges themselves insist on that because they want that capture,” Callan said in an interview. “They want you to have to get in and out of positions on their exchange, because it increases their volume, but it comes at a cost to the quality of their liquidity. There’s not a lot of market depth behind each listing and it’s very sporadic.”