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If You Can’t Beat Em, Join Em???

Traders Magazine Online News, February 6, 2019

David Weisberger

With the announcement that Bittrex has joined Kraken, Coinbase, itBit and other exchanges by offering an OTC trading desk, it seems that most exchanges have decided that OTC trading is their best chance to grow their business.  This comes amidst a backdrop of OTC desks out-competing the exchanges for market share, particularly for large traders, according to many published reports.

To achieve a dominant market share, however, the exchanges must earn the trust of investors in the fundamental fairness of the market.  Public order books that facilitate price discovery should have a unique and important place in establishing that trust. Unfortunately, the current fragmented exchange landscape is hard for many investors to navigate .  Large investors have issues with the lack of credit lines at exchanges (while OTC desks provide them) and the difficulty of moving assets between them, partially due to artificial barriers created by the exchanges themselves.  These barriers, stem from the individualistic culture of cypherpunk and Silicon Valley that gave rise to crypto.

It is quite ironic, but the crypto community should learn about cooperation from Wall Street, which, despite a public perception of embodying unfettered, “bare knuckle” capitalism, has a culture of cooperative endeavors.  Unlike Silicon Valley, which tends to operate on the principle of one of my favorite movies, The Highlander (“There can be only ONE”), Wall Street is based on shared business practices. Whether it was the original “members only” exchange (NYSE), the largest self regulatory members organization (FINRA), widespread adoption of multi-broker trading platforms or the FIX protocol that facilitated that, or standards for derivatives documentation accepted by all, cooperation is entrenched.  Crypto exchanges, for the most part, however, refuse to cooperate with each other, making it hard for clients to navigate the fragmented marketplace. Individual exchanges should work together to promote best execution, manipulation surveillancecredit lines & clearing, all of which would help mainstream investors gain needed trust in the system.   

Getting back to the examples cited in the opening, those exchanges that are trying to compete with OTC markets face two divergent paths:  

  1. Exchanges could attempt to compete with the OTC market by offering such services directly, on their own,  or
  2. Exchanges could strengthen online price discovery by cooperation.  This could entail setting up or empowering intermediaries with electronic agent functionality with smart order routing and pan-exchange algorithmic trading that focuses on best execution.

Path 1: Establish Independent OTC Desks Without Cooperating with Exchange Competitors

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