“When institutional money?” was the cry of retail investors through 2018, as crypto assets sagged and hopes of salvation faded. Institutions have since entered the space, and began to take up positions in bitcoin and other leading assets, but it would be exaggerating to say there’s been a stampede from the direction of Wall Street.
For that to happen – and it’s by no means a given that it will necessarily happen – there are certain provisions that need to be in place. Custody and liquidity are the big two, but they’re not the only requisites for driving greater institutional investment. What moneyed investors are lacking, at present, is a means of consolidating all of their cryptocurrency trading services under one roof.
Enter the primer brokerage.
From 80s Wall Street to the Digital World Today
Prime brokerages sprung up in the 1980s with the goal of bundling investment services into a one-stop shop for other financial institutions to access. You might have heard of the companies who came to dominate the prime brokerage sector, which have names like Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and UBS Group AG (NYSE:UBS). These companies perform a range of services, including acting as the go-between for hedge funds and counterparties such as pension funds. Prime brokerages can also provide securities lending in exchange for some kind of collateral.
Crypto, thus far, is lacking its Goldman Sachs. Sure, it’s got giants in Binance, Coinbase, and Huobi, but no one that can provide a complete suite of services for institutional investors. But all that could be about to change. Quietly yet assuredly, a handful of companies are emerging, each promising to deliver institutional investors what they want: the full shebang, wrapped in one big, beautiful prime brokerage package. The success or failure of this plan hinges on the execution of what on the surface is a straightforward strategy, but which contains a lot of moving parts underneath.
Troy Trade is one of the firms gunning for the mantle of crypto prime brokerage. It promises to supply sophisticated investors with the sort of tools that the Goldmans of the world have been providing financial firms for years. While there are undoubted similarities with the traditional financial world, applying a cookie cutter approach to the crypto sector won’t work. Delivering similar products in a crypto context calls for redesigning brokerage products to suit the unique needs of the market. Broadly speaking, Troy and its fellow crypto brokerage firms, whose number can be counted on one hand at this time, aim to deliver the following:
- Deep liquidity through connecting the order books on multiple tier-one exchanges
- OTC and margin products
- Ultra responsive trading engine with low latency to enable HFT
- Extensive market data including full historical data for assets and trading strategies
- Advanced quantitative solutions
Each of these services alone could command the efforts of a medium sized startup. Mastering the lot and merging them into a seamless prime brokerage service is quite an undertaking.
[caption id="attachment_770509" align="aligncenter" width="750"] TroyTrade’s extensive market data analytics. First of a kind among crypto exchanges.[/caption]
The Pros and Cons of Prime Brokerage
From the perspective of the investors it’s designed for, prime brokerage is a net positive. It’s the first step to greater institutional involvement in the crypto space through the provision of trading products that can cut it with the best that Wall Street can offer. Provided trading fees are competitive, and trust can be earned, financial companies will readily utilize the services of a bespoke broker. When they’re investing millions of dollars of client funds, there’s really no other option. There needs to be professional onboarding and compliance services that are institutional grade, for a start, which is something exchanges cannot, as yet, satisfactorily provide.
For retail investors, who will have no interest in prime brokerage, the growth of one or more such firms will nevertheless have a knock-on effect. More institutional money entering the space won’t float your altcoin bags, or usher in a 1,000-year bull market. It will increase the liquidity and dampen some of the volatility of leading crypto assets, however. More importantly, it will further legitimize the cryptoconomy in the eyes of those who have doubted it up until now. Bitcoin doesn’t need the approval of financiers, regulators, and politicians to function. But the more friends it can make along the way, the less barriers to mainstream adoption crypto will encounter. First come institutions. Then the world.
Disclosure: No positions in any of the stocks mentioned in the article.