- Institutions need to know they are operating within a compliant system and that their funds are secure.
- Liquidity is important for any trader, both to avoid slippage and ensure trades can be executed in a timely manner
In 2020 and 2021, crypto markets have seen an influx of institutional investors.
An impressive and growing number of money managers, corporations, hedge funds and other institutions have sought an allocation to Bitcoin and other cryptocurrencies.
But accessing this new financial frontier isn’t always easy. Crypto markets generally don’t have the same level of maturity, liquidity or regulation that institutions are accustomed to.
Retail exchanges typically aren’t equipped to provide the kind of trading environment that institutions demand.
Here are five things that institutional investors in cryptocurrency must have.
A reliable trading platform
Retail exchanges have a terrible reputation for being reliable during times of high volatility. Name any mainstream crypto exchange and it’s almost guaranteed that they crashed for a period during the last big crypto correction. Many traders lose money when this happens, as they’re unable to sell before prices dip further or buy before prices rebound.
This would be unacceptable to an institutional investor in cryptocurrency.
Institutional-grade exchanges consider 100% uptime to be key to their service offering, ensuring their customers’ trading strategies can be carried out at any time.
“The most important consideration for an institution when choosing a trading venue is trade execution — encompassing consistency of executions and low latency executions,” according to Campbell Millar, chief operating officer at LMAX Group.
In effect, the first question institutions ask is, “Can I always get reliable execution?” he said.
Institutional exchange venue controls
Venue controls are another important part of an institutional-grade trading experience. They reduce opportunities for market manipulators and ensure a level playing field for all market participants.
Venue controls include things like:
- Volatility bands
- Order throttle rates
- Clip size bands and limits
- Surveillance controls and alerts
Venue controls are also implemented rigorously on LMAX Digital, as Millar described:
“We have a number of controls designed to create an orderly market. These include volatility bands, order throttle rates, and more traditional risk controls such as working order and clip size limits,” he said.
In addition, LMAX Digital has surveillance alerts that trigger, for example, when a customer’s trading pattern appears to be feigning interest in an attempt to try and move the market, a potential indication of spoofing, or wash trade alerts where simultaneous buy and sell orders are entered by a client where there’s no logical reason for those trades.
Depth of liquidity
Liquidity is important for any trader, both to avoid slippage and ensure trades can be executed in a timely manner.
Crypto markets trade thinly compared to traditional markets in foreign exchange, equities or derivatives.
Exchanges that serve institutions must provide sufficient liquidity for large orders and high trading volumes.
Regulatory compliance and secure custodial solutions
Institutions need to know they are operating within a compliant system and that their funds are secure. These might be the biggest concerns of all in the crypto markets, as regulations remain unclear and securing digital assets can be a burden.
An institutional-grade exchange must function under the purview of a specific regulatory framework that institutions can trust.
Ideally, this involves an exchange entity being regulated by an authority that already has digital asset regulations in place.
The latter bullet is key because of Gibraltar’s crypto-specific regulatory framework, according to Millar. “Gibraltar is a British overseas territory that has a specific crypto regulatory framework, so they provide a regulation for operating a digital exchange,” he said. “We are regulated by the Gibraltar authority and the Gibraltar financial service commission. They operate with very similar principles to the UK FCA (Financial Conduct Authority) which we already work under in the wider LMAX Group’s FCA regulated entities.”
Institutional investors aren’t going to take ownership of their private keys and hold them on a hardware wallet. Instead, institutions need a robust custody solution they can rely on.
LMAX Digital goes to great lengths to keep customer funds secure. In fact, after consulting with several respected experts in the industry, LMAX Group executives determined their best course of action would be to build a new custody solution of their own making.
As Andrew Phillips, chief technology officer at LMAX Group put it: “We concluded that we needed to write [a custody solution] ourselves. So, we’ve written our own. It’s our own technology from the ground up. We’ve built and architected it in such a way that it makes a lot of sense for our primary customer base.”
Because LMAX Digital uses geographical separation in combination with air-gapped multi-signature cold storage wallets, compromising the system would have to involve infiltrating two highly secure locations. “You need to pull off two Ocean’s Elevens in order to actually access those funds,” said Phillips.
LMAX Digital basically takes everything that the LMAX Group has achieved in foreign exchange and adapts it to a digital asset trading platform. There really isn’t another exchange like it on the market for institutional investors in cryptocurrency, added Phillips.
Institutional pricing, access to fiat on-ramps
In addition to all the above, institutions need to know that their trading platform will provide the following:
- Fair competition
- Competitive fees
- Access to fiat on-ramps into crypto assets
Having a level playing field to trade on means competitors won’t have any undue advantage. Low fees make trades more profitable. And moving fiat into crypto is obviously necessary for trading in these markets and can be difficult for those working with large amounts of capital.
LMAX Digital meets all the criteria listed above in ways that exceed expectations. To name a few:
- The exchange operates with 100% uptime
- Venue controls ensure an orderly market
- The exchange has proven its capability to handle high volumes during times of extreme volatility
- A custom-built unique custodial solution keeps the majority of funds in deep cold storage
- Regulated under the authority of the British territory of Gibraltar