February 7, 2023 | Stamford, CT — The evolution of market structure in the wake of the FTX collapse and evolving trading practices demonstrate that buy- and sell-side institutions have not abandoned crypto trading, which is even attracting several of the world’s biggest hedge funds.
The market structure for digital assets was built with retail, high net worth, venture capital, family office, and crypto-native investors in mind. Since the collapse of FTX, new approaches have been adopted that make the asset class more institutionally friendly for firms that remain vigilant and focused on the long term. Those improvements will support the high-profile hedge funds that have raised billions of dollars for crypto investments in recent months. Post-FTX, these institutions continue to seek out highly specialized firms that can handle their trading and infrastructure requirements.
“Institutional-grade service providers continue to support trading, custody, settlement, staking, and other services,” says David Easthope, Senior Analyst for Coalition Greenwich Market Structure & Technology and author of Digital Asset Market Structure 2023: The Where and How of Trading after FTX. “We expect this migration to quality to continue in 2023.”
Shift to Non-Vertically Integrated Firms
Despite the growing sophistication of the asset class, for the past few years a portion of the digital asset community has gravitated to providers that allow market participants to trade, settle, custody, and lend/borrow digital assets all on a single platform. FTX revealed the faults of the vertically integrated model without proper risk controls, transparency and governance, effectively bringing about the beginning of the end of that business model in the United States and likely in Europe, too.
In this new environment, the buy side is seeking out trading counterparties they trust and will look for liquidity among a variety of platforms, with about 60% of buy-side institutions expecting the majority of trading volume to occur on decentralized exchanges over the next two years, continuing a trend that began in 2021.
“Institutions are helping to drive the evolution of market structure by pushing the migration to institutional-grade infrastructure and continuing to adopt traditional capital markets trading methods, such as order books and streaming liquidity,” says David Easthope.
Digital Asset Market Structure 2023: The Where and How of Trading after FTX outlines recent changes to digital asset market structure, examines how traders are altering their trading practices in terms of trading methods and venues, and looks at how market practices and regulation will alter the trading landscape going forward.