Selecting the right technology partner is one of the biggest challenges for fund managers wishing to enter the digital assets space. What are the key considerations when selecting a platform to access liquidity in the coins that clients want to trade? How easy is it to connect an existing platform to a digital assets platform for execution, clearing and settlement, and what are the potential pitfalls to be aware of?
Selecting the right technology partner is one of the biggest challenges for fund managers wishing to enter the digital assets space. What are the key considerations when selecting a platform to access liquidity in the coins that clients want to trade? How easy is it to connect an existing platform to a digital assets platform for execution, clearing and settlement, and what are the potential pitfalls to be aware of?
Tom Higgins (pictured), CEO, Crypto Switch, a digital asset technology company for institutional investors, explains: “Liquidity in traditional assets is plentiful and easily accessible. Digital asset liquidity and connectivity is a completely different game. There are very few standards, a huge variety in terms of quality and professionalism, and greatly varying charges.
“Fund managers seeking the optimum setup need to use a platform that unifies all of the non-standards into standard protocols, like FIX. They need to select a technology provider with strong relationships with all relevant counterparties and who can provide access to the highest quality ones and the best pricing. As digital assets trade 24/7, it is important to find a solution that can operate during these hours – many OMS cannot work 24/7.”
The starting point for any fund manager beginning this journey is research and discovery. Take time to learn about the market and all its foibles. A specialist technology provider in this space will be able to provide guidance and help to address the key challenges that a new entrant to the market may face.
Sourcing the right liquidity
“Scale is really important in the space,” continues Tom Higgins. “When crypto trading started to gain traction, it was the preserve of hobbyists and retail investors. As the institutional market has gathered momentum – largely because institutional calibre infrastructure is now in place – one of the biggest challenges for funds has been getting access to large ticket sizes.
“This is where sourcing the right liquidity is vital. Using a single retail exchange will not give deep enough liquidity or guaranteed availability that will be demanded by hedge fund clients. Aggregation of multiple sources with synthetic order book banding and central settlement or clearing solve all of these issues.”
The optimum trading environment
It can be extremely complex to set up a digital asset trading platform with low latency and full clearing capabilities for multiple coins. This is where specialist technology providers are required. They can also support the platform 24×7.
The ideal solution for fund managers is to connect their existing trading platform to a bespoke digital asset platform using standard protocols, like FIX, and leverage the relationship that the technology provider has with relevant clearing houses. Clearing or net settlement is vital to avoid building-up positions in multiple venues which is cash intensive and inefficient.
As part of a digital asset strategy, many fund managers wish to make extra revenue by distributing their own digital asset liquidity to clients. Choose a platform with the functionality to do this – even if it isn’t something required from the outset, it may be required as the fund managers’ digital asset strategy evolves.
Why now?
With so much talk about the crypto winter, is now the time to be considering a digital assets strategy?
Tom Higgins continues: “Highs and lows are nothing new in the crypto market – it’s a market which is maturing and is here to stay. I believe that digital asset volumes in the institutional market will substantially overtake retail volumes in the not too distant future.
“From what we are seeing and hearing, there seems to be an increasing appetite for digital assets in the institutional sector. In fact, since the crypto winter began, we have seen a significant increase in inbound leaders for our Crypto Switch, which plugs into existing infrastructure and provides access to institutional grade crypto liquidity and is fully integrated with central settlement and clearing partners.
“I’d say that now is the ideal time to plan adding digital assets as it takes time to pull all the components in place. This is a really exciting space to be operating in – there are huge opportunities for fund managers to grow their businesses – but they will undoubtedly come unstuck if they don’t speak to a technology expert before getting involved. Technology vendors can take the pain of integration away and provide 24/7 service, allowing the manager to focus on what they like doing best… the trading.”
