Can Market Makers Catch the Crypto Bus?

By Fraser Bell, Chief Commercial Officer of BSO

For the global trading community, trying to make a quick buck from currency markets over the past few years has been the equivalent of waiting for a London bus. But as the old saying goes, one can wait an eternity for one, and then two suddenly come at once.

After a prolonged slump, daily FX volumes are finally on the rise again – up 24% from this time last year and up 15% from December (according to CLS). In addition, with Bitcoin up one day and down the next, electronic market makers suddenly have more than one currency market to exploit. While an uptick in traditional volumes can only be good for FX markets, volatility is still comfortably below long-term average levels. Hence why the crypto bus is the one many speed-starved traders will be looking to jump on sooner rather than later. And it is not hard to see why. After all, these guys base their entire trading business around big price swings. And with crypto pairs such as Bitcoin/Ethereum fluctuating in value across multiple markets, there is no shortage of opportunity for computer savvy firms to profit quickly from price differences.

Depending on the time of day or night, Bitcoin alone has experienced swings of 10% or greater in the space of just a few hours recently. And late last year, the price of NEO, OMG and ETP nose-dived 90% in minutes on the Bitfinex exchange before bouncing back. As far as the electronic trading community is concerned, events like this should provide more than a smattering of déjà vu. These same firms now dipping their toes crypto would have been at the centre of the October 7 Sterling Flash Crash. Not too dissimilar from recent crypto crashes, this is when the pound plunged by 9 per cent against the dollar in seconds in overnight trading.

While the direct causes are still debated, high-speed trading was inevitably linked to this event. Granted, the structure of FX markets now looks very different in this post-MiFID II era, but when it comes to making money from volatility, as witnessed during the Sterling flash crash five months ago, speed is still king. The crypto market is, of course, no different. In fact, if anything, the sheer scale of crypto activity makes the need for speed even more significant. It is not just the electronic market makers getting in on the act, certain banks and asset managers are also in the mix – albeit using more conventional forms of trading.

The problem is that the more participants the greater the competition, which puts a greater emphasis on quickly evaluating vast quantities of crypto pricing data. This is where the electronic trading firms can steal a march, by using their more sophisticated analysis to do what they do best – trade on information quicker than the rest of the market. Where these firms can really get ahead of the game is by executing orders to ensure the latest activity reflects the last market price of say, Bitcoin. On top of this, their algorithms can provide almost real-time insight on the best execution of a crypto trade. But as with all technology adapting to new markets, particularly one as complicated as cryptocurrency, there can be a period in which trading maturity doesn’t quite match the level of expectation. Successful companies will therefore be those that take advantage of volatility across all asset classes, rather than only focusing on the crypto craze.

Whatever its role in the trading cycle, the inclusion of cryptocurrency as part of a wider trading strategy will, like much of the traditional FX markets today, require network infrastructure to support it. In order for the crypto market data mined to be valuable, it has to be easy to access and analyse, allowing electronic traders to isolate what is useful from the large volumes of noise. Not difficult to manage in theory, but the relevant connectivity to new venues, such as the CME crypto futures exchange, is required to ensure a sudden spike whenever the next Swiftcoin or Litecoin surge materialises. With the estimated value of all cryptocurrencies now above $170 billion and rising, only those quickest to fine-tune their trading behaviour will be ones to catch the crypto bus before it’s too late.

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This article was previously published by TRG client BSO in Markets Media here