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What does a fair and orderly market in crypto look like?

Friday, February 19, 2021

Over recent months, cryptocurrency markets have witnessed accelerated growth. As traditional low-risk assets like treasury bills and bank deposits fail to return significant yield, and the mushrooming money supply of the world's global reserve currency fuels rising concern over inflation, cryptocurrencies as hard assets have gained a lot of traction.

From renowned global macro investors like Stanley Druckenmiller and Paul Tudor Jones to high-profile publicly traded companies like MicroStrategy, Square, and, more recently, the world's most valuable car company Tesla, the floodgates have begun to open, ushering in a massive change in sentiment from institutional investors. 

But, while the crypto industry has indeed grown up fast, when compared to other major asset classes like gold, with a total reserve valued at $9 trillion, it still has a long way to go – hovering at just under $1.5 trillion in total market cap, at the time of writing. Bitcoin (BTC) is still the dominating force with 62.1% of the entire market cap. But while the influx of institutional investors is certainly of note, there are still plenty of areas for improvement.

The Importance of a Fair and Orderly Market in Crypto 

As a nascent industry, a lot of work has been done to build the infrastructure to capture institutional interest. Yet, if the institutional dollars are to stay (and keep pouring in), the cryptocurrency markets must strive for less fragmented liquidity. To execute large orders, institutions need liquidity and a fair and orderly market complete with responsible market makers to ensure that bid/ask spreads are kept tight, order books have sufficient depth, and that trades can be entered and exited seamlessly.

Currently, there is insufficient liquidity across most crypto assets to allow the space to expand to accommodate the entry of larger institutions. Most major funds in the traditional financial markets still see BTC as a very small asset class with high barriers to entry and high friction that creates high direct and indirect costs of transacting.

Let's say, for example, an institutional investor wanted to purchase $500 million of BTC. Today, that transaction would only be possible by using algorithms and transacting over several exchanges over a longer period of time. This process must be done to minimize price impact on the market, as well as getting the best price possible for the buyer. 

What Market Makers Do

Market makers provide liquidity to both buyers and sellers in a financial market making it easier for assets to be bought and sold quickly without notably affecting their price. Market makers keep order books thick and remove friction and inefficiency by acting as a buyer or seller of "last resort." That's to say when there are no natural sellers or buyers to fulfill the order, the market maker steps in to "make the market."

This is essential for the cryptocurrency markets to allow them to become more efficient by reducing the price volatility that occurs in illiquid markets. Without trusted external market makers, the markets would have low liquidity and wide bid/ask spreads. This leads to high slippage costs for traders and has a direct impact on the total volume traded (the lower the liquidity, the lower the trading volume). Market makers thus facilitate orderly markets by posting tighter bid/ask spreads. The size of the spread has a direct influence on the volume traded, with a tighter spread generally resulting in more volume traded.

With a wide spread, traders stand to lose money on their investments. If institutional traders wanted to buy and sell large amounts by going deeper down the order books, their losses would be significant. Market makers, therefore, provide well-organized and cost-effective entry points for traders by ensuring thick order books, reduced volatility, and large volumes of funds to be traded without friction.

The Need for Trusted External Market Makers

Unfortunately, in the cryptocurrency space, many market-making companies have emerged that follow questionable or even opaque practices that can create problems for digital asset issuers and unfair insider advantages such as last-look, front-running, and wash trading to make trading volume appear higher than it really is. 

Many so-called "market makers" have little to no background in traditional finance and tie token issuers into schemes that are detrimental to their growth. In order to create a digital asset exchange that customers can trust, teaming up with the right market maker becomes absolutely critical.

As a fully AML and KYC compliant institutional cryptocurrency exchange – the first such trading platform to be publicly listed on the NASDAQ – EQUOS aims to provide sustainable solutions that serve the needs of institutional investors. We allow them to meet their compliance burdens while providing the certainty of operating in a fair and orderly market.

We have a strong customer-first policy and a high focus on ethical solutions. This means that EQUOS will never make markets inside our own exchange, trade against our customers, or take advantage of inside information. EQUOS follows a code of good conduct to ensure that revenue leakages, slippage, and other practices detrimental to our customers never occur on our exchange. 

That's why, with decades of experience managing global trading and quant businesses, GSR makes the ideal market maker partner for EQUOS. Drawing on invaluable experience from some of the most reputable names in financial markets including Goldman Sachs, Nomura International, Two Sigma, and Citadel, GSR has become a respected name in the space – as well as one of the fastest-growing and most transparent.

Through this latest partnership, EQUOS can provide traders on our platform with high liquidity and a tight spread making it attractive to institutional investors and high-volume traders that can operate in a trustworthy and transparent market. 

Staying the distance

Financial markets, including the cryptocurrency markets, need to operate efficiently so that traders and investors can buy and sell assets without friction or unnecessary cost barriers. Ethical external market makers are needed to ensure that trading volume and liquidity increase so that institutional traders remain satisfied and engaged.

As institutional interest in digital assets continues to rise, the cryptocurrency markets also need to focus on sustainable solutions that draw on the efficiency and integrity of traditional financial markets. As cryptocurrency becomes more mainstream, early adopters and exchanges that fail to implement orderly, ethical, and fair markets – or that siphon profits from their customers through opaque market-making practices – will be unlikely to stay the distance.

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