OrBit Markets Launches with Ambition to Bring Exotics to Crypto
Posted by Colin Lambert. Last updated: April 7, 2022
The crypto evolution thus far has largely been a story of volatility, trend and yield – all of which have, generally speaking, been out-sized from Day One. More lately, however, there are increasing signs of what some might call the maturing of the cryptocurrency market, with the poster child, Bitcoin, hemmed in a range and vols significantly lower than those seen in the last decade.
A new firm, founded by Deutsche Bank FX alumni, is responding to the changing conditions in crypto markets, however, as it seeks to fill an important gap in the digital assets product set. OrBit Markets has been co-founded by Caroline Mauron, former co-head of FX for APAC at Deutsche; Zhiming Yang, who was APAC head of FX derivatives at the bank; and Tianjiao Sun, who has joined from AI tech firm Cerebras, but also worked for Deutsche as an FX derivatives trader for six years until 2014. “The team has deep expertise in bringing together technology and quantitative finance, and we aim to leverage that experience in developing a new area within the crypto ecosystem,” explains Mauron.
The new firm has been established to offer structured products and exotic options in cryptocurrencies, something Mauron says will offer access to the still-nascent asset class for investors and traders. “These products are so common in traditional finance, and we see growing demand for them in crypto,” she explains. “We are seeking to bridge the gap between TradFi and digital assets.”
It is, perhaps, another sign of the maturing of the digital assets ecosystem that OrBit Markets sees what Mauron describes as a “huge opportunity”. Early adopters were able to exploit sizeable arbitrage opportunities trading the basis between cash and futures, and on vanilla options, vols were also offering strong returns but these have diminished, leading to more demand for structured products to fill the gaps and offer the same sort of yield that the early adopters are accustomed to.
The target audience for OrBit Markets is very much in the wholesale space, what could be termed “crypto-banks” and crypto-native hedge funds are likely to be enthusiastic adopters, along with family offices, especially in Asia. “Asian family offices already use structured products in FX and equities extensively,” Mauron observes. “We are offering access to a new underlying, with higher implied volatility and potential returns.”
Equally, there are opportunities for traders seeking to express a view or hedge exposures. “At the moment, liquidity providers in decentralised exchanges are trying to hedge their impermanent loss exposures using vanilla options, but that rarely matches their exact exposure,” Mauron explains. “These firms are constantly rebalancing their hedges to match the delta and risk exposures, whereas we can offer them a bespoke solution with an exact pay off.”
As to why these types of products have not been offered before – it would certainly seem that the demand is likely to be there – Mauron believes it is very much about the demographics of these who have moved from TradFi to the digital assets world – quite simply, no one has looked at the problem from an exotic options point of view. “Some corners of the crypto ecosystem are very advanced technically because a lot of people have moved from FX and equities market making and HFT to the space,” she points out. “In terms of options and especially exotics, however, it’s a very different picture. Very few people have moved from the exotics side in FX and equities until now.
“Our approach, is to manage the associated risk from providing our clients with the products they want,” she continues. “This is not really about first, second or third generation exotics, it is about a pay off and we can adapt to what our clients need. We are all former options traders and this is really our core expertise – pricing and managing risks from products such as these. We are agnostic as to the type of payoff, we can manage whatever makes sense to our clients.”
The establishment of exotic options in crypto markets does seem to be a natural progression, especially as Bitcoin and other major coins seem trapped in an albeit relatively wide range. As hedge funds in the traditional space enter the crypto world, they are likely to want to be able to express a more nuanced view than perhaps we have been used to seeing in crypto markets where HODLing still seems to reign supreme. There are going to be challenges, however.
As crypto firms seek membership of ISDA, which is, in turn, studying the complexities of legal and documentation in the crypto space more closely, industry standards around these two areas will advance, and, no doubt, drive adoption, especially by the institutions being targeted by OrBit Markets. That said, the operations and settlements areas of the business remain a work in progress – there is no Swift in crypto for example and the DeFi structure doesn’t lend itself to such a centralised solution.
Mauron also points to a couple of other obstacles to be overcome. “While the products we offer will be close to FX and equities in their make up, there are crypto-specific things that need to be understood – for example, the funding rate,” she observes. “Funding rates in crypto are much more volatile than we see in traditional markets and that is something people need to be mindful of.
“There is also a challenge for quant-driven funds looking to enter this space,” she adds. “There simply isn’t that much data for back-testing, which means these firms may have to think a little differently in how they operate – at least initially. The data in Bitcoin is OK, and improving, but in many of the other coins it is very scarce.”
“Our background from a product perspective allows us to bring our expertise to a new asset class, and at the same time we are able to offer clients from traditional markets a gateway to a new asset class through products they are very familiar with.”
That said, there are also potential benefits for these funds from the crypto market structure with the level of transparency thanks to the blockchain. Compared to an OTC market, for example, a higher percentage of actual trade data should be available, making it easier for funds to manage their risks and build their understanding of market behaviour in almost real-time.
While it remains early days for both exotic options on crypto assets and OrBit Markets, the pace with which the crypto space is evolving suggests that things can change quickly. If that is the case, there is likely to be an advantage for the firm in the experience of its founders. Equally, the similarities between how firms interact in the TradFi and digital assets markets will help, for example, Mauron says the indications are that – as it is in in FX and equities – vol supply will come from Asian markets to meet vol demand from the US.
Ultimately, however, another similarity between the two markets will also be vitally important – the need to meet the demands of different client sectors – and Mauron says OrBit Markets is ready. “We see strong demand for yield enhancement, hedging and the type of products that allow sophisticated traders to express a nuanced view,” she says. “Our background from a product perspective allows us to bring our expertise to a new asset class, and at the same time we are able to offer clients from traditional markets a gateway to a new asset class through products they are very familiar with. This makes it a perfect time for us to launch.”