THETRADETECHFX DAILY in-depth
The convergence of crypto and FX
The retail FX market may have firmly embraced the new age of crypto , but on the institutional side caution remains - despite growing awareness and levels of interest . According to findings shared by WBR Insights , 45 % of buyside FX traders said the rise of institutional crypto asset adoption was impacting their trading and investment strategy to some extent , but they were waiting for the crypto market to evolve before making any decisions . In turn , nearly a third of FX desks surveyed are already highly involved in the cryptocurrency space , while just under a quarter said they had no plans to trade crypto . So is there realistically a place for crypto on the traditional FX trading desk and what might greater institutional adoption mean for the FX market as a whole ?
Edd Carlton , Institutional Digital Asset Trader at market maker and proprietary trading firm , Flow Traders , believes there are already marked similarities between FX and the way the crypto market is evolving . These include the increasing adoption of industry standards , such as FIX protocols , and the growing prevalence of multi-dealer platforms and ECNs in the OTC crypto market . He adds that there are also reciprocal effects which crypto is having back on FX .
“ Crypto is seen as a 24 / 7 marketplace , which is quite a new phenomenon ,” Carlton says . “ A marketplace that is open all hours should be more efficient and offer greater transparency , which strongly resonates with us at Flow Traders , whereas the FX market to date hasn ’ t been 24 / 7 . If we look at euro and dollar stable coin - cryptocurrencies which are predicated on an underlying fiat currency - we can see how this might lead to the emergence of round-the-clock trading in cable pairs , for example . That would create a very interesting landscape and is something that the FX markets haven ’ t particularly seen before .”
Digital assets in the FX space There are also parallels between pricing cable or euro dollar to pricing Bitcoin dollar , according to Carlton . “ At Flow Traders ,
Crypto is converging with conventional finance at a startling rate , and the trend is the big FX buzzword . NICOLA TAVENDALE explores what this means for the markets .
we created a business pillar called CCC - currencies , crypto , commodities - with a view to leveraging our market knowledge and experience from trading FX and precious metals and applying this to the crypto markets , as well as vice versa ,” he adds . “ We ’ re also seeing norms being established . One of the main questions we receive from new counterparties who want to connect to us for OTC crypto liquidity is : Do we have a FIX API they can connect to ? FIX is definitely an important industry standard in the financial markets and FX , which is now being normalised within crypto as well .”
In addition , the increasing adoption of crypto could also result in larger spread opportunities , says James Stickland , CEO at institutional crypto trading platform provider , Elwood Technologies . As the world shifts to more tokenized and digital asset use , he argues that there is clearly an opportunity for capital market participants to trade , make markets and benefit from the volatility in the immediate term . “ Institutional adoption is already happening . For example , our recent Crypto Hedge Fund report showed assets under management in hedge funds increased to $ 3.8 billion from $ 2 billion the year before ,” Stickland adds . “ As the institutional involvement continues and thus the depth of liquidity increases , we will see growth in the trading volumes , creating further opportunities .”
However , the same study also found that 83 % of the hedge funds which hadn ’ t invested in digital assets so far had cited regulation as the cause . Stickland explains that the large financial institutions , particularly tier one banks , are looking for guidance from the regulators before they have comfort in the correct way to approach digital assets . “ Once that regulatory guidance is provided , the barrier to entry for traditional finance will be significantly reduced . Then just as we have seen in traditional markets , once one firm generates significant success in the asset class , all others in the field will take note and follow suit ,” he adds .
Barriers to entry A further key difference lies in how spot crypto settles on an OTC basis . Pre-trade and the means of executing OTC trades can be compared like-for-like between FX and crypto , but where the market differs is in the lack of credit intermediaries , or prime brokers , who stand in the middle of the trades and the backstop , says Carlton . The farreaching impact of recent insolvencies in the crypto market earlier this year , including the collapse of TerraUSD and crypto hedge fund Three Arrows Capital , have highlighted the importance of having credit intermediaries in crypto and the fact that there are not any really at the moment .
This means that the counterparties trading OTC crypto are doing so on a bilateral basis , Carlton adds . “ It is extremely important that the people they are facing for these trades have very strong credit worthiness . Flow Traders has positioned itself well in that space , being a publicly listed , regulated company with almost 20 years of trading experience , we are able to give the market comfort in standing behind our trades .”
For buy-side investors , trading a crypto future or cash settled crypto product is exactly the same as trading any other futures contract . Where the barriers really emerge is when they look at physical delivery , Carlton warns . This is not due to a lack of custodians , he explains , but rather due to reputational
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