The trend of automation is getting more and more obvious, can bitcoin over-the-counter trading be more powerful?

“Hello, can you help me look at the real bid of 100 bitcoins?”

A seller asked on Skype.

"Slightly – with, it's $10,270."

Two minutes later.

"Sorry, this is an old news on Friday. At the time, my Skype had a problem and the message didn't go out."

"I really feel that we should abandon Skype. Because it is possible that this kind of bad thing can happen. Someone will make a costly mistake." This is a exchange of information between a European asset management company that sells bitcoin and broker Joel Fruhman on a potential million-dollar transaction, from which it is not difficult to find the arbitrariness and chaos of cryptocurrency transactions.

Transactions involving hundreds of thousands of dollars or millions of dollars are usually reached through short chats on applications such as Skype, WhatsApp, WeChat or Zoom, which are often unable to determine the identity of the participants or the legal basis of the agreement.

“We will end up with about 5 'introducers' on the Zoom phone – we don’t know anything about the identity of these people,” Fruhman said.

“Who are we? What is our credibility? This is equally unknown to others.”

In 2018, Fruhman and his brother Dan founded a cryptocurrency brokerage firm in their hometown of Manchester, England.

However, over-the-counter trading through brokers is now beginning to change.

Reuters interviews with more than a dozen industry insiders show that as the cryptocurrency field matures, from the domain of network enthusiasts to emerging financial assets that attract mainstream interest, the field is moving in the direction of electronic automation.

This is a fundamental shift because messaging applications have been the mainstream platform for many years.

This is a key attempt by cryptocurrency enthusiasts rooted in the traditional financial industry to try to mainstream a largely unregulated single industry. As we all know, this industry is seen as a rebellion against the existing system and provides users with near-anonymous services.

Over-the-counter trading is favored by large investors such as hedge funds, as cryptocurrency exchanges often face liquidity problems, and large purchase orders can drive the market.

However, due to the opacity of the messaging process and the impracticality of large-scale use, coupled with the existence of some glitch that can lead to "costly errors," the use of such applications has been risky.

Now, as the liquidity of the encryption market grows and the spread (the difference between the buying and selling prices of instant orders) tightens, over-the-counter brokers and market makers are seeking to get rid of the simple chat method and switch to automatic execution and settlement. , quoted electronically.

"The trend of the (encryption industry) shift to electronic trading is growing very rapidly," said George Zarya, chief executive of a London-based cryptocurrency exchange. The company also operates an OTC counter and plans to switch to automation.

“Any thing with liquidity – Bitcoin or Ethereum – these markets will go electronic. This is the only way for traditional markets,” Zarya asserts.

Based on interviews with cryptocurrency brokers, market makers and investors, these changes may attract larger investors using algorithms and high-frequency trading, for whom instant trading is important.

An encryption dealer based in California and Hong Kong, China, launched an almost fully automated OTC counter about six months ago. Ryan Salame, head of over-the-counter trading at Asia Pacific, said the daily trading volume at the trading desk has reached $20 million to $30 million.

For Salame, the future of OTC trading is electronic, and all cryptocurrencies can be quoted electronically.

“This is just the next step in your competitiveness. Every trading desk is working hard to improve competitiveness and build a better system,” Salame said.

"When it is impossible to update the chat history and the user can not get the expected price in time, the spread has been expanding, and electronicization is a by-product of this time."

Bridge between miners and buyers

Fruhman's two brothers, 29-year-old Joel and 28-year-old Dan met Bitcoin miners on Internet forums and apps and created contacts. The brothers found that many of them faced a problem: they were mining Bitcoin faster than they were.

"We look very real: a group of people with a lot of bitcoin don't know how to cash out," Joel said. Then the next thing is not difficult to imagine.

At the end of last year, in order to attract more investors and provide more sophisticated back-office services, the brothers exchanged their own newsletter for a startup company that is well versed in financial infrastructure (from escrow accounts to settlement systems). ) The former financiers operate.

A startup based in the financial district of London offered something that the Fruhman brothers lacked: regular contacts with customers of mainstream financial institutions who were willing and able to purchase regular cryptocurrencies from miners previously known to the brothers.

“The people we met this time were different from the 22-year-old miners a year and a half ago,” Joel said.

“It’s also different from stock traders, or Goldman’s. These people are somewhere in between.”

Trading in the Bitcoin bubble

Global cryptocurrency trading volume is extremely unstable. According to research firm Coin Metrics, in the past year, only Bitcoin's daily trading volume ranged from $900 million to $3 billion.

Brokers estimate that the over-the-counter market typically accounts for 10% to 30% of global trading volume.

As the value of Bitcoin soared during the 2017 bubble, the over-the-counter market boomed. At that time, miners, high-net-worth individual investors, hedge funds, and companies that monetized by encryption became active in the market.

Industry insiders said in an interview that the encryption market is undergoing a new transformation as the dominance of instant messaging applications weakens and more sophisticated tools used in traditional markets such as stocks and bonds become more common.

Kevin Zhou, co-founder of a San Francisco-based OTC platform, said: "Transactions via Skype and voice chat are virtually non-scalable."

This evolution is partly driven by new entrants in the industry, many of whom have cutting-edge technology, partly from traditional proprietary trading, and others that specialize in cryptocurrencies.

These changes are welcomed by big investors.

“I prefer e-services because all of our algorithms are fully automated,” said Andrea Leccese, president of a New York company. “It would be much better for us to send quotes electronically to an off-exchange broker.” This is an investment company that often orders $5 million to $10 million through an over-the-counter trading platform.

Leccese added:

“It’s fair to say that about half of the over-the-counter transactions are undergoing technological innovations, such as creating a fully electronic platform, which is better for us.”

The regulation of cryptocurrencies around the world is uneven, limiting the illegal use of digital currencies is a top priority, and the impact of the increasing automation of over-the-counter trading is unclear. But some market participants say that as these changes may attract more mainstream investment, this will likely become a factor in accelerating the introduction of rules similar to traditional market securities.

Machines and people, what better?

While improving automation may be inevitable, many OTC counters are still being held out. Some customers are reluctant to give up their personal relationships with brokers and the applications they use to communicate.

Michael Moro, chief executive of New York-based Genesis Global Trading, said the company's monthly trading volume is about $1 billion. Although this figure is lower than the $2 billion to $2.5 billion in the bitcoin boom of 2017, the current monthly trading volume of Bitcoin is growing at a rate of 10% to 20%.

Genesis is currently using TradeBlock (a company that offers cryptocurrency trading tools in New York) to execute transactions, but does not completely abandon the messaging application.

"We add color to the market via Skype, but the actual transaction is done through TradeBlock." Moro said.

“When those customers who placed $5 million or $10 million said to you, 'We use Skype to chat,' we have to say 'No, we are not trading on Skype', this is not self-deprecating.”

For the Fruhman brothers, interpersonal relationships remain key.

“Our plan is to build an automated platform where users can check quotes on our front-end website,” says Dan.

“But what's interesting is that many people actually like the interaction between people.”

“Not just 'like',” Joel added quickly.

"If you are trading $20 million, you are not clicking a button – you want to push up the price, you want to feel it, you may also give it up directly."

“I think that this kind of OAS-oriented person will always exist as part of the OTC.”

This article comes from: Reuters

Original author: Tom Wilson

Translator: Nian Yinsi Tang

Produced | Odaily Planet Daily (ID: o-daily)

Original article; unauthorized reprinting is strictly prohibited, and violation of the law will be investigated.