- Big Wall Street market making and high frequency trading firms are pouring more money and talent into trading cryptocurrencies
- Institutional demand is spurring on competition in the cryptocurrency markets with substantial returns from gross inefficiencies possible
Tucked away in a nondescript office building in downtown Singapore, a group of twentysomethings knocks back cans of Red Bull as they pour over thousands of lines of code to figure out how to optimize their order management system.
No, this isn’t Singapore’s next big startup nor are the coders looking to make money from stocks or other traditional financial assets, instead, a young and talented team of software developers is looking to discern the ever increasing number of ways to make money from the inefficiencies inherent in cryptocurrency trading.
As any seasoned crypto trader will tell you, the price for any specific crypto asset depends on where you’re looking to buy or sell that asset, and how much of it.
Given the decentralized nature of cryptocurrencies, exchanges both big and small, with both real and fake volumes, post prices for thousands of crypto assets, providing myriad opportunities to skim and profit from arbitrage and price dislocation.
Which is what has drawn some of the biggest names on Wall Street in the market making business to duke it out in cryptocurrencies, in an attempt to cash in on the lucrative flows coming from institutional investors.
Some of the biggest names in the U.S. equity markets, including Jump Trading, GTS and Jane Street, are all stepping up their investment in cryptocurrency trading after years of secrecy surrounding their initial forays into the nascent asset class.
High frequency trading has transformed the landscape of the U.S. equity markets, with highly optimized, low-latency execution of trades that help market makers like Jump Trading, GTS and Jane Street make just pennies on each transaction, but billions in revenues a year.
Many of these market markers now want to bring their expertise honed in equities into cryptocurrencies, as institutional investors are increasingly drawn by the high returns the digital asset space has on offer.
Analysts at JPMorgan Chase (-0.24%) estimate that by late last year, high frequency traders were responsible for almost 80% of the Bitcoin prices sent to exchanges, with many of these computer-driven trades targeting the “basis trade” – the discrepancy between the spot price and derivatives price of a cryptocurrency.
For instance, earlier this month, the spread between Ether and an Ether future expiring in March next year was as wide as 7.1%, allowing a trader to lock in that spread by simply buying the underlying token and selling the futures contract.
But Wall Street firms may have their work cut out for them as the cryptocurrency markets are by design decentralized, and specialist cryptocurrency trading firms are already prowling the markets with potentially the exchanges themselves, many of which remain unregulated, blocking their path to easy profits.