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24 May 2023 – London: TP ICAP Group, a world-leading provider of market infrastructure, announces that Fusion Digital Assets – its marketplace for spot cryptoassets – is now live and has successfully completed its first XBTUSD pairs trade with the associated settlement processed by Fidelity Digital Assets℠.
Fusion Digital Assets is a trading venue for institutional market participants only. The venue is distinctive because its segregated operational structure aligns with traditional financial markets rather than cryptoasset markets seen to date. This means that independent providers perform specific, segregated roles that cover trade execution, custody, and settlement.
The venue’s core elements include:
- Fusion – TP ICAP’s proprietary, award-winning electronic platform – provides clients with a non-custodial cryptoasset exchange for order matching and trade execution;
- Fidelity Digital AssetsSM, an industry-leading custodian, provides independent safe keeping of clients’ inventories and settlement services through a segregated model;
- An anonymous aggregation of streaming liquidity from world-leading market makers and uncorrelated liquidity from TP ICAP’s global client base; and
- Being operated by TP ICAP E&C Limited and registered with the FCA as a cryptoasset exchange provider.
Fusion Digital Assets combines TP ICAP’s established expertise in operating venues and organising execution, with Fidelity Digital AssetsSM institutional-grade custodial capabilities, and diversified liquidity from TP ICAPs global client base. The venue currently supports trading in Bitcoin and Ether against USD. Going forward, it will expand the assets it supports in line with client demand. It will also add further custodians to develop a multi-custody model.
Simon Forster, Global Co-Head of Digital Assets at TP ICAP Group, said: “We are excited to be live with Fusion Digital Assets, a solution we believe the market needs. The venue provides the fundamental operational structure and governing principles that clients recognise and expect, but which have been largely missing from the market until now. Combining independent and segregated custody with an FCA-registered cryptoasset exchange helps to shape the future of cryptoasset market infrastructure. Add TP ICAPs liquidity and distribution capabilities and we are uniquely positioned to service clients’ needs. The first live trade is another milestone for our business, and we look forward to enhancing product functionality from here.”
TP ICAP clients and partners commenting on the completion of the first trade include:
Manuel Nordeste, Head of European Business Development, Fidelity Digital Assets℠ Europe, said: “Today is a further milestone in our collaboration with TP ICAP and the evolution of the digital assets ecosystem to enable even more participation from institutional investors. Our collective goal is to enable investors to navigate this nascent asset class, execute trades, and custody their assets with confidence.”
Mike Kuehnel, CEO, Flow Traders, said: "Flow Traders is a strong supporter of developments that enhance the institutional digital assets infrastructure, promoting efficient markets and best practices. We acknowledge this pioneering approach and are pleased to partner with TP ICAP to develop this next generation marketplace for digital assets. We are looking forward to advancing this project and our partnership further."
Philippe Bekhazi, Founder and CEO of XBTO Global, said: "Our liquidity partnership with TP ICAP combines our expertise in the digital assets space with TP ICAP's deep knowledge of traditional financial markets. Together we are offering clients new ways to access institutional liquidity and execution services. Today is a significant step forward in our mission to make digital assets a mainstream asset class."
Roger Wurzel, Head of Trading, DLT Finance, said: “As a leading BaFin-regulated digital asset-focused securities trading bank and custodian, we are excited to work with TP ICAP. Their unwavering commitment to regulatory compliant trading ensures a secure and trustworthy platform for institutional investors to access and navigate the digital asset market. Together with TP ICAP, we contribute to the growth of the institutional digital asset ecosystem, delivering exceptional solutions to our valued clients.”
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The full breakdown
In our first article, "Navigating Crypto Volatility: The Advantages of Active Management," we explored how the high volatility and low correlation of digital assets with traditional asset classes create unique opportunities for active managers. We discussed how these characteristics enable active managers to execute tactical trading strategies, capitalizing on short-term price movements and market inefficiencies. Building on that foundation, we now turn our attention to the unique market microstructure of digital assets.
Conducive market microstructure of digital assets
The market microstructure of digital assets - a framework that defines how crypto trades are conducted, including order execution, price formation, and market interactions - sets the stage for active management to thrive. This unique ecosystem, characterized by its continuous trading hours, diverse trading venues, and substantial market liquidity, offers several advantages for active management, providing a fertile ground for sophisticated investment strategies.
24/7/365 market access
One of the defining characteristics of digital asset markets is their continuous, round-the-clock operation.
Unlike traditional financial markets that operate within specific hours, cryptocurrency markets are open 24 hours a day, seven days a week, all year round. This continuous trading capability is particularly advantageous for active managers for several reasons:
- Immediate response to market events: Unlike traditional markets that close after regular trading hours, digital asset markets allow managers to react immediately to breaking news or events that could impact asset prices. For instance, if a significant economic policy change occurs over the weekend, managers can adjust their positions in real-time without waiting for markets to open.
- Managing volatility: Continuous trading provides more opportunities to capitalize on price movements and volatility. Active managers can take advantage of this by implementing strategies such as short-term trading or hedging to mitigate risks and lock in gains whenever market conditions change. For instance, if there’s a sudden drop in the price of Bitcoin, managers can quickly sell their holdings to minimize losses or buy in to capitalize on the lower prices.
Variety of trading venues
The proliferation and variety of trading venues is another crucial element of the digital asset market structure. The extensive landscape of over 200 centralized exchanges (CEX) and more than 500 decentralized exchanges (DEX) offers a wide array of platforms for cryptocurrency trading. This diversity is beneficial for active managers in several ways:
- Risk management and diversification: By spreading trades across various exchanges, active managers can mitigate counterparty risk associated with any single platform. Additionally, the ability to trade on both CEX and DEX platforms allows managers to diversify their strategies, incorporating different levels of decentralization, regulatory environments, and security features.
- Arbitrage opportunities: Different venues often exhibit price discrepancies, presenting arbitrage opportunities. For example, managers can buy an asset on one exchange at a lower price and sell it on another where the price is higher, thus generating risk-free profits.
- Access to diverse liquidity pools: Multiple trading venues provide access to diverse liquidity pools, ensuring that managers can execute large trades without significantly impacting the market price.
Spot and derivatives markets (Variety of instruments)
The seamless integration of spot and derivatives markets within the digital asset space presents a considerable advantage for active managers. With substantial liquidity in both markets, they can implement sophisticated trading strategies and manage risk more effectively.
For instance, as of August 8 2024, Bitcoin (BTC) boasts a daily spot trading volume of $40.44 billion and an open interest in futures of $27.75 billion. Additionally, derivatives such as futures, options, and perpetual contracts enable managers to hedge positions, leverage trades, and employ complex strategies that can amplify returns.
Overall, the benefits for active managers include:
- Hedging and risk management: Derivatives offer a powerful tool for hedging against unfavorable price movements, enabling more efficient risk management. For instance, a manager holding a substantial amount of Bitcoin in the spot market can use Bitcoin futures contracts to safeguard against potential price drops, thereby enhancing risk control.
- Access to leverage: Managers can use derivatives to leverage their positions, amplifying potential returns while maintaining control over risk exposure. For instance, by employing options, a manager can gain exposure to an underlying asset with only a fraction of the capital needed for a direct spot purchase, thereby enabling more capital-efficient investment strategies.
- Strategic flexibility: By integrating spot and derivatives markets, managers can implement sophisticated strategies designed to capitalize on diverse market conditions. For instance, they may engage in volatility selling, where options are sold to generate income from market volatility, regardless of price direction. Additionally, managers can leverage favorable funding rates in perpetual futures markets to enhance yield generation. Basis trading, another strategy, involves taking offsetting positions in spot and futures markets to profit from price differentials, enabling returns that are independent of market movements.
Exploiting market inefficiencies
Digital asset markets, being relatively nascent, are less efficient compared to traditional financial markets. These inefficiencies arise from various factors, including regulatory differences, market segmentation, and varying levels of market maturity. For example:
- Pricing anomalies: Phenomena like the "Kimchi premium," where cryptocurrency prices in South Korea trade at a premium compared to other markets, create arbitrage opportunities. Managers can exploit these by buying assets in one market and selling them in another at a higher price.
- Exploiting mispricings: Active managers can identify and capitalize on mispricings caused by market inefficiencies, using strategies such as statistical arbitrage and mean reversion.
The unique aspects of the digital asset market structure create an exceptionally conducive environment for active management. Continuous trading hours and diverse venues provide the flexibility to react quickly to market changes, ensuring timely execution of trades. The availability of both spot and derivatives markets supports a wide range of sophisticated trading strategies, from hedging to leveraging positions. Market inefficiencies and pricing anomalies offer numerous opportunities for generating alpha, making active management particularly effective in the digital asset space. Furthermore, the ability to hedge and manage risk through derivatives, along with exploiting uncorrelated performance, enhances portfolio resilience and stability.
In our next article, we'll delve into the various techniques active managers employ in the digital asset markets, showcasing real-world use cases.
