Key takeaways from Devexperts webinar: ‘How to Deliver Crypto to Retail Traders’
Devexperts has hosted a webinar on how to deliver crypto trading to retail investors as brokers increasingly look to address demand from clients. The session explored the options for decision-makers to inject this asset class into their offering from technology, regulatory, and technical standpoints.
The webinar hosted by Nikolai Isayev, Editor-In-Chief at FinanceFeeds, started out 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, Market Data Division at dxFeed.
The first question – why are crypto assets so different from a technology perspective? – was addressed to Jon Light, who explained the difference is in the origins: the first crypto exchanges were initially designed to exchange fantasy playing cards.
This means that the first venues weren’t built on great financial technology, from standards to security, testing, nor there was experienced gained from other financial markets and rules.
For example, Mt. Gox – the largest exchange in market share in 2013, which filed for bankruptcy a year later after a huge hack – was created to exchange Magic The Gathering cards.
Although the platform was adopted for crypto it didn’t have the technical capacity, which led to huge transaction delays and security issues.
So, back then, platforms were built with no experience, no resources, and no proper financing to build robust technology for financial markets. But even now in 2021, from time to time, there are issues with some of the largest cryptocurrency exchanges, not to mention the smaall and unregulated ones.
Enter Devexperts, a renowned provider of financial software for brokerages, exchanges, and wealth management firms. The company has already developed a few cryptocurrency exchange platforms from scratch and consulted a dozen startups.
As Devexperts continue to experience great demand for software to trade digital assets, they gathered crypto technology experts in one place to share their knowledge and educate the audience.
Below you’ll find out why Devexperts, together with market data subsidiary dxFeed and liquidity partner GCEX, is in a perfect position to help brokers looking to launch a crypto offering.
A stable, secure, and scalable retail offering needs a straightforward protocol, such as FIX, and a reliable data feed, especially if the broker is running a b-book.
On that, dxFeed’s John Willock went into detail on the liquidity issues that plague the digital asset space, including the accusations of falsification of trading volumes in unregulated venues.
This poses challenges in terms of the quality of the data and their source. So, it’s critical that brokers partner up 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 alone. There’s a lot of other data that need to be looked at, like depth of book and quote quality rather than the post-trade.
FinanceFeeds’ Nikolai Isayev then asked GCEX’s Henry Price what types of offering brokers should consider from a settlement standpoint.
While perpetual swaps are traded peer-to-peer, Mr. Price focused mainly on CFD and spot products as the broker is often a market-maker. Brokers are more used to CFDs, which are MiFID II instruments and firms have their licenses to market them.
The UK, however, banned crypto CFDs for retail investors but launched a digital asset register, where firms can apply for a specific license to offer crypto spot trading.
Mr. Price added that each blockchain has different requirements, some being technically and regulatory easier to provide custody support than others. That has a direct effect on the number of instruments available for trading.
In regard to crypto CFD products, a lot of them can be hedged with leverage of 1:5, but 1:10 might be too an aggressive approach for such volatile products.
The digital asset space is also known for its disruptive events such as hard forks (when the blockchain’s architects decide on an upgrade which results in the existence of a new version of the blockchain in the market) and airdrops (when tokens are added to a wallet in the proportion of its holdings).
GCEX, one of Devexperts’ liquidity partner, handles hard forks by refraining from settling for a few hours while the chains are in flux because of the uncertainty in settlement.
The risk with airdrops depends on the product: if spot or CFD. There’s a convenience to hold the underlying asset. This means that, if you hold spot, you will get the reward. However, if you have a CFD position overnight, that could be quite problematic, Mr. Price stated, referring to the risks of leveraged positions during such event.
These kinds of events have been quite a challenge throughout the years, but custodians and LPs have become far better at informing the clients regarding the calendar dates, risks involved, and precautions to take.
dxFeed’s John Willock explained events such as halvings, airdrops, and hard forks come down to corporate action information. “Those systematic ones are more straightforward to understand but there’s no standardized format”, he continued, stating that some publish that information on blogs, others on Twitter or their website. “This requires additional work”.
Mr. Willock also warned of the risk involved in airdrops and hard forks as holders may have to expose their keys to a new piece of software to retrieve assets. This is a whole new layer of complexity that isn’t found in dividend distribution of traditional securities.
Back to Jon Light, the VP of Trading Solutions at Devexperts reminded that the maturation of custody solutions, with cold storage, rigorous compliance standards, and insurance policies, was the number one reason for the institutional adoption we’ve seen in recent years.
It seems to be inevitable that brokers will start looking for custodians to offer deposit and withdrawals in crypto to address the demand and there are a lot of options out there.
In regard to compliance overheads, custodians are in the best position to assist brokers as they have their AML procedures set up, depending on the jurisdiction.
Liquidity is always a key challenge for brokers and for that reason, GCEX’s Henry Price reiterated that to hedge low, people should look at spreads, but also depth “because a lot of retail brokerages are not price discovery venues but large entities, at market-making level”.
So, how to go about a crypto offering for retail investors? The main ingredients are deep liquidity, regulation and compliance, custody, payment rails, and a team that either speaks your language or has a track record in finance.
The short Q&A had Jon Light stating that the Devexperts crypto platform is built on their existing framework and it can perfectly route to two or more different LPs.
As to payment methods, the platform has its own API to process deposits and withdrawals and can connect to all kinds of wallet providers and custodians, and is able to add more on-demand.
Devexperts has a matching engine with a high throughput, so the platform is perfectly able to handle orders on a 24/7 basis using a scalable system with multiple nodes.
Devexperts offers a SaaS service and gives brokers the tools to run their business and support the system. The liquidity partner, GCEX, is linked to four custodians and can offer secure trading of approximately 20 CFDs. Only ten are supported for spot delivery.
Generally, most custodians offer one large account for each broker and all deposits go underneath, but an increasing number of custody firms are now offering sub-accounts, especially for regulatory reasons. In the United States, segregated accounts are a requirement.
dxFeed offers data analytics services on a standalone basis to a full display solution, including any kind of chart visualization tool. Underlying analytics that are typical in the traditional securities trading space can be replicated.
Lots of questions were answered during the webinar, but as this topic is inexhaustible, send us your question to discuss your unique challenge in person with Devexperts solution experts, here.