Can crypto exchanges survive the expected deluge of institutional investment? Today, that bet is even money.<\/p>\n
Satoshi Nakamoto never intended to graft bitcoin onto the existing international financial markets. It was meant to operate in parallel and be an uncorrelated alternative.<\/p>\n
The crypto markets began, like most typical markets, as over-the-counter transactions between individual investors before crypto exchanges began popping up like mushrooms to facilitate easier trading. Once that happened, it began piquing the interest of institutional investors.<\/p>\n
However, what it takes to support retail investors and institutional investors regarding services and support is quite different.<\/p>\n
Individual investors have shown over the past few years that they are happy to invest without a standard instrument taxonomy, third-party custody, reference data, transaction cost analysis, and smart order routers, which are non-negotiables for institutional investors.<\/p>\n
Does it make sense for digital-exchange operators to chase the institutional cryptocurrency market and make the necessary investment to replicate the business model of self-regulatory organizations?<\/p>\n
It doesnt. Digital exchanges currently make their money from their sizable trading commissions while giving away their market data, which is a mirror image of the SROs.<\/p>\n
Even if exchanges did make the necessary investments to meet the requirements of institutional investors, they might be waiting a long time to cash those institutional trading commissions.<\/p>\n
Institutional trading, by its nature, is OTC trading. Buy-side traders want to keep their order flow off the displayed markets as much as possible to avoid moving the market against them.<\/p>\n
All buy-side traders need is a reference price and size to use as a benchmark for their trade negotiations, which the digital exchanges already give away for free, before registering their trades in the appropriate distributed ledger.<\/p>\n
Trading digital securities, on the other hand, presents its own issues. Regulation D or Regulation A securities are illiquid instruments at best and do not fare well on limit order books.<\/p>\n
If digital exchange operators wanted to pursue the digital securities market, they would need to develop matching methodologies that are similar to those in the interdealer markets.<\/p>\n
In this case, exchanges could generate revenue from its market data and trading fees as well as a host of tangential services, such as developing and issuing the digital securities.<\/p>\n
All the digital exchange operators would be doing is adopting the same business plans of private securities trading but swapping out the middle and back office for a token-based infrastructure.<\/p>\n
<\/p>\n
Read more from the original source: <\/p>\n
OPINION: Institutional Trading Could Kill Crypto Exchanges - Markets Media<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" Can crypto exchanges survive the expected deluge of institutional investment? Today, that bet is even money Continue reading