FTX and IEX: An Interesting Partnership
Posted by Colin Lambert. Last updated: April 6, 2022
The crypto market structure is still developing, but it is interesting that at the retail end of the spectrum it often feels very similar to equities; while at the same time at the institutional end, there seems to be a drive for an FX market-like structure.
In the middle of this – just as they span both FX and equities markets – sits a group of high-speed market makers, all of whom like to see the retail flow, but also want a piece of the institutional pie, especially if it involves traditional asset managers. Typically these managers like to get things done quickly – the faster the better – and the sense is, talking to people in the crypto business, that many of these firms would like to see an equities-style market structure win out. It just fits their business model better.
This all makes the announcement of a link-up between crypto exchange FTX US, and US stock exchange IEX, all the more interesting. IEX was, of course, the exchange at the centre of so much controversy in US circles when it introduced a speed bump to its exchange, much to the outrage of firms that had spent hundreds of million on trimming latency.
By establishing the partnership – it is a sign of the times that FTX US is investing in IEX – the firms say they want “to establish a clear, simple, and transparent market structure for buying, selling, and trading digital asset securities”. Furthermore, the firms’ release stresses the work of IEX to provide “investor protection” through such measures as the speed bump and Signal, an order type that allows the trader to dictate how the exchange handles the order, especially when markets are unstable.
The release further states, “Since its inception, FTX US has worked closely alongside regulators to set up an exchange that meets retail and institutional investors’ crypto asset trading needs in a regulatory compliant manner. IEX will build upon the Company’s existing market structure and regulatory principles to safeguard the best interests of investors and the public at large as the digital asset securities market emerges and grows to reach its full potential for US participants.”
This suggests that digital assets trading at FTX US for one, is likely to be more attuned to a market structure not built upon lightning-fast connectivity. It will be fast, technology is, but perhaps this is the first play by a crypto exchange to take the “H” out of “HFT”. If it is, it is an interesting play because until the institutions really buy in – and here we are talking real money type players – the volume players in the crypto industry will likely shy away from the venue.
This does, of course, open the door to other LPs, those built upon a more traditional framework of inventory and risk warehousing (for more than a few seconds), and it will be equally interesting to see if they step up. It is probably too dramatic to say this move signals the start of a battle for the heart of the crypto industry, but if the deal does indeed signal IEX bringing its “protection” measures to crypto (and of course they have been in place for years in FX on some venues), then liquidity consumers may soon have a choice between the very tight top of book in small; and a slightly wider spread, but in the sort of size they want to see.
There is a tendency in some quarters to paint crypto as a brand new, never-been-seen-before, market, but it isn’t. It’s a market, and one that will face just the same challenges around market structure that other, traditional asset classes have faced. There would be no little irony in the combination of a crypto exchange and stock exchange creating a market structure very familiar to FX market participants, but it could happen.