Institutional Investors Building Crypto Derivatives Trading Infrastructure Just Need the Cloud

Institutional investors spent tens of millions building proprietary trading infrastructure at data centers close to the market. In the era of crypto all they need is code on a cloud server.


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key takeaways

  • Unlike traditional finance exchanges which used large, complex data centers, digital asset exchanges use cloud computing offerings from Amazon and Microsoft
  • Institutional investors no longer have a latency race, needing to build their servers as close as possible to markets’ data centers. All they need to do is run code on the same cloud provider as the exchange.

Market accessibility is a big theme for digital assets and it goes beyond allowing retail traders better access to yield. As explained on a recent webinar, crypto’s embrace of cloud computing instead of proprietary data centers makes it more accessible to investing firms of any size, not just the world’s biggest financial institutions. 

In the era of the ‘Flash Boys’, Wall Street’s high frequency traders, trading firms looked for every advantage they could to get their data to the trading center’s servers faster than their competitors.

But in the world of cryptocurrency trading things have changed. Exchanges like Binance, Coinbase, or FTX which collectively push through tens of billions of dollars in volume every day aren’t hidden away on expensive servers running proprietary software in exclusive data centers. They, like many of the world’s other web-based applications such as Netflix or Facebook, run on cloud servers such as Amazon’s AWS or Microsoft’s Azure. 

“If you look at how traditional trading infrastructure has been made, a bank or institution will co-locate in a data center of a physical exchange and they will buy expensive physical hardware,” explained Gabriel Bassas, vice president of Avelacom, a telecom company that primarily serves the finance industry. “Whereas with crypto exchanges, they are based in cloud environments. From a customer’s [virtual machine] to the cloud, there’s an undetermined variable. That’s something that institutions are unfamiliar with.”

And that unfamiliarity brings an advantage to crypto native funds that didn’t exist years ago when traditional finance (tradfi) funds were building out their expensive physical infrastructure.

Bassas explained on the webinar that all crypto funds need to do is deploy their trading code on the same cloud provider as the exchange — no need to build expensive physical infrastructure at the same data center the exchange is hosted at. 

“Before you know it, you’ve built out a smart auto order routing network at very low cost and very. So essentially you’ve got a cloud network and a proprietary network,” Bassas said. 

As both the trading firm’s code and the exchange are based within the same cloud service provider’s infrastructure, the data doesn’t even hit the internet as it stays within the internal network of the cloud provider. 

Reducing the barrier of entry

“There used to be a massive barrier of entry for traders in the form of trading infrastructure. You have to spend a lot of money, and invest a lot of time, and have a lot of specialties and in terms of building infrastructure,” Bassas said. “You can access and build trading infrastructure in a matter of three days at the max. The barrier to trading has been removed.”

Cloud providers like AWS or Microsoft’s Azure have different cloud servers around the world to serve customers that span geographic regions. In order to execute a geographic arbitrage strategy, all a trader needs to do is deploy the code on different geographic instances: one on a cloud server in Hong Kong, then in London, and again on the US East Coast. The cost to do so is marginal; all it takes is a few clicks on the cloud provider’s web portal.  

As the webinar was sponsored by Avelacom, Bassas’ company, he was quick to point out the significant advantage trading firms can get when using cloud providers — of which Avelacom is optimized for — and his network. He claimed when paired the two can offer a latency advantage of up to 77 milliseconds.

In comparison, tradfi trading firms of yore would spend millions to get an advantage of even a millisecond.

Given the low barriers to entry of crypto and its embrace of cloud computing, the entire financial trading infrastructure industry is getting shaken up. Much like how cloud computing a decade ago disrupted the need for technology companies to have their own servers, something similar is happening in finance thanks to crypto.

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