Posted on September 2023 By iO Associates
Last month, PRG's sister company Finitas partnered with BSO to host an informative FinTech roundtable event with some of the industry's leading experts. Surrounding topics debating the facilitation of integrating seamless digital assets, this roundtable provided a space to share information and address this growing challenge in the FinTech sector. iO Associates work closely alongside the Tech and Digital industries, ensuring to provide you with the best insight available.
Read on to discover the critical factors to addressing this challenge, and look out for part two of this insightful technological function to find out more.
Introduction from BSO
How can we facilitate seamless digital asset trading for institutions?
BSO has identified several critical factors to address this challenge:
While traditional markets have remained stagnant for some time, the world of digital assets offers institutions new sources of liquidity. How can they get involved?
Traditional Market Connectivity
FIX was originally launched in the early 90s (a time before the modern internet!) and has grown to dominate institutional market connectivity within trading; it’s the protocol that most investment banks and brokers use to “talk” both to each other and to trading venues. Its strengths lie in the fact that it covers all asset classes and the organisation behind it — the FIX Trading Community — have modelled more and more workflows in it over the years, including order delivery and execution, quoting, market data, and even into after- the- trade activities such as settlement.
FIX really was well ahead of its time when it was first launched, and while it has a learning curve to it, it is simple and robust enough that it is still well-suited to the job today, thanks to the fact that it is very efficient, and it is extremely well -supported.
Crypto Market Structure
Bitcoin started in the retail space and in the public cloud which gave start -ups the opportunity to innovate, a disruptive ecosystem has grown out of this which would never have got off the ground if it had to be signed off by traditional institutions and regulators. Now Trad- Fi firms want to embrace cryptocurrencies but the regulators are not making this easy.
The challenge is how to build an institutional-grade market structure when most trading is currently in the cloud: as crypto markets and institutions converge, there is still a difference in expectations.
From Cloud to Institutional Grade Software
There are parallels to the current set up in crypto and digital asset markets, but how do cryptos move from a cloud-based retail structure to institutional grade software platforms. Some participants suggest the digital asset platforms may not actually want to attract institutional investors.
The 24/7 market hours of crypto markets is a consideration many institutions initially failed to consider, equally, the technology and automation required to support these ‘always-on’ markets is a hurdle all parties need to address.
REST/Websocket and FIX
One of the trends that we are seeing with more recent trading venues (which tend to be crypto exchanges), is that they are starting to offer both REST/Websocket and FIX interfaces. REST and Websocket plus web APIs are required for institutional-level trading. The REST portion is essentially a “request - response” interaction. But this doesn’t work for “push” notifications such as market data, or notifications of a trade after a period of delay which is what the Websocket portion of the API handles.
Exchange Connectivity and Regulation
There are new crypto exchanges setting up every month, but often their technology is new for large institutions. Many banks have tried to address this by creating a spin off crypto specialist arm and this is expected to continue although some have been more successful than others.
Some crypto exchanges are not targeting institutional clients at all, they still only want to deal with retail as they see it as more profitable to service. In Asia, there are multiple crypto native trading firms, lots of them are setting up in Hong Kong as its easier for regulatory reasons. REST and Websockets are of no interest to them, they just want to trade in an easier way.
US and UK crypto exchanges do tend to use FIX and REST API for holdings even though they would prefer to be able to say everything is in DLT. This is largely because they want to integrate with banks. However, Asian crypto exchanges are very focussed on speed and use Python, they more geared towards retail clients and don’t always consider onboarding a requirement or client function.
Demand for Talent
Blockchain is, by nature, a young space and graduates join crypto firms because they want to build new technology. They all know they need Python but not many of them have been exposed to FIX.
Conversely, banks are losing out to FinTech’s in the talent war because they aren’t offering the same programming languages, although the salaries might be higher.
As of today, there isn’t an obvious replacement for FIX even though it’s not particularly fast. Any move away from the Cloud will be complex for crypto firms but could offer technology and price benefits: to create a level playing field you need multicast which is currently not supported in the Cloud. As they mature, they may find the Public Cloud too generic and not customisable enough for their specific needs. Ultimately this is all about the convergence of a disruptive technology designed for retail markets that is now in demand by the institutions who have a different technology set up and are hugely regulated. We look forward to the next conversation around this topic.
Stay in touch with iO Associates and Finitas to hear about our upcoming Whitepaper following these topics alongside new insights! Follow our LinkedIn here.
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