United States-based cryptocurrency exchange ErisX recently announced the public launch of its spot market trading, a move that takes the company a step closer to its goal of being a one-stop shop for the trading of spot and futures contracts in a regulated environment. Just before the end of April, there were reports that TD Ameritrade, which has some 11 million retail clients, has been testing ErisX’s crypto exchange and could soon offer crypto trading on its platform, where clients already trade traditional financial products.
Beyond crypto spot market, which is what most existing crypto exchanges offer and is also what ErisX’s spot trading is about, ErisX plans to launch a derivatives exchange once the U.S. Commodity Futures Trading Commission (CFTC) approves its application to operate both a derivatives exchange and a clearing house.
As a quick refresher, a spot market is a trading venue — digital or otherwise — where financial instruments such as securities, commodities and currencies are traded for on-the-spot delivery. Therefore, a crypto spot market would be any venue, such as exchanges, where you can instantly trade cryptocurrencies.
These investors — which include TD Ameritrade, DRW Holdings, CBOE, TradeStation and Nasdaq, just to name a few — are interested in ErisX for a few reasons, all of which sum up to the fact that they see promise in how the crypto exchange is building a robust, transparent, integrated and regulatory-compliant market infrastructure in the crypto space. John Bartleman, president of TradeStation Group, in a press release, said:
“TradeStation is actively working to help bridge the gap between traditional markets and crypto markets. Our investment in ErisX supports further advances in the crypto market structure and will help bring more established players into the space. Supporting firms like ErisX, that understand regulation and markets, benefits the crypto ecosystem.”
TD Ameritrade, on the other hand, has seen increasing demand for the trading of crypto products from its retail customers. So, the American brokerage firm invested in ErisX because it sees the crypto exchange operator as a viable avenue to offer its customers access to the crypto market in a transparent way. Tim Hockey, CEO of TD Ameritrade said:
“As investors in ErisX, as well as a strategic contributor in the initiative, we are looking forward to advancing our innovation goals by working with an established, CFTC-regulated exchange that will include digital asset futures and spot contracts on a single platform.”
Steve Quirk, executive vice president of Trading & Education at TD Ameritrade, added that:
“Our retail clients are seeking to access and trade digital currency products in the same way they do with traditional capital markets — through a legitimate, regulated and transparent exchange. That’s precisely why we chose to invest in ErisX — to make digital currency products more accessible to retail clients.”
While U.S.-regulated exchanges including Coinbase and Gemini already offer institutional trading products in some ways, their services don’t cover the extensive needs of institutional investors.
U.S.-based derivatives market operators CBOE Global Markets and CME Group were the first to offer cash-settled crypto futures. “Physical” is only a relative term to indicate that actual bitcoin is being traded for cash, as opposed to trades where only cash is changing hands based on the price of bitcoin.
During a meeting with the CFTC on Feb. 14, 2018, Richard Gorelick, the head of market structure at the trading firm DRW, said:
“We continue to have concerns that the way these futures contracts are pegged to these cash markets, which are less transparent, could result in dislocations in the future. We’ve expressed our view that we would like to see physically settled cryptoasset contracts to help deal with some of these concerns.”
Cointelegraph had reported in June 2018 about possible manipulation of bitcoin prices for gains in the bitcoin futures market. If they’re cash settled, I have to make another trade to unwind the spot position at expiration and I have to hope that I can unwind my position at the expiration price (including fees) even though I may not have the ability to trade on the exchanges that are being used to determine settlement price.” Similar to ErisX, Bakkt is developing both crypto spot and futures market. Beyond creating a market infrastructure that attracts institutional players, Bakkt wants to build and develop crypto use cases, according to Bakkt’s chief operating officer Adam White.
Following Bakkt’s announcement of a futures market for physical bitcoin settlement last year, See told Business Insider:
“If bitcoin is trading at a discount in the spot market relative to the futures market, a trader can go long bitcoin and short the future for a profit. This is hard when a future settles in cash because it requires a trader to make another trade.”
A more transparent crypto spot market
The CFTC last year reportedly requested trading data from top exchanges, following reports that the spot market might have been manipulated for gains in the futures market.