THE FUTURE OF FX: DRIVING THE INSTITUTIONAL CRYPTOCURRENCY MARKET

Two key trends have come to the fore in the global currency markets, particularly in the last 12 to 18 months, with both potentially resulting in sweeping changes to how, where and even why FX is traded.

The second of these shifts, namely the growth of FX trading in Asia, was explored in greater depth by a panel of FX industry professional held this May in The London Stock Exchange – hosted by The Realization Group and sponsored by BSO.

The Realization Group’s Mike O’Hara began the second part of the panel discussion by noting that most activity in the cryptocurrency space has been retail in nature and based on speculation.[/vc_column_text][vc_column_text]

But is there likely to be institutional demand for digital currencies as this market evolves?

According to Ramy Soliman, CEO at Stater Global Markets, technology can clearly improve in this space, as it tends to be very rudimentary when compared to the sophisticated matching engines we are used to in FX.

But he added that institutional FX liquidity providers are now “using their edge” to provide crypto trading in a manner which can be consumed by the retail consumer. “That is a very good development,” he observed.

Tom Higgins, CEO at Gold-i, agreed, adding that the evolution of the cryptocurrency market has been a really interesting journey so far, with a few false starts along the way. Higgins explained:

“Even when the futures exchanges such as CME and CBOE entered the market, none of the banks would clear the contracts for our clients. The way to go is probably CFDs.”

A maturing market?

Overall, people tend to still think about the current market in terms of Bitcoin, but that just isn’t the way it is going to be going forward, according to Higgins.

“The technology behind Bitcoin is so far behind the curve of what’s on the horizon. There are so many advancements coming up which will make it much more efficient.”

But in the false start cited by Higgins, the CFTC had pressured CBOE and CME to raise their margins, Eddie Tofpik, Head of Technical Analysis and Senior Markets Analyst at ADM Investor Services International, explained. He argued:

“The futures contracts were probably the biggest bearish signal of any crypto move. It will continue to go up like any other currency, or perhaps like gold, there will be CFDs and now you have the data you can start doing options in it.”

It will be fragmented and illiquid on occasions as well, Tofpik warned, but the big market for crypto is Asia, while banks are also slowly starting to go into it – such as Goldman Sachs.

Regulatory intervention

Another key aspect of the crypto market is of course the underlying distributed ledger technology, otherwise known as blockchain.

According to Stephane Malrait, Head of Market Structure and Innovation for Financial Markets at ING, this is of particular interest to institutional firms. He added:

“We have seen a few good use cases of this technology in non-high frequency trading activities such as trade finance.”

The panel discussed how most institutional demand is likely to come from prop trading firms initially, rather than from pension funds, asset managers etc. One panel member said:

“The regulators will need to get involved for crypto to become a valid option for these investors. If it is regulated you will see bigger institutions entering the market.”

Michael Ourabah, our CEO, agreed that the regulatory environment is key to developing this market. He concluded:

“Trading the composite and derivative instruments will be helped by having regulatory moves from the EU and the US before anything happens. We’ll see more derivative contracts being launched until there is proper regulation.”

To discover more on this topic, read our report on “Taking the Leap into Asia and Cryptocurrencies: The Future for FX Trading?”

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