Crypto and the Latency Arms Race: Market Microstructures

Max Boonen is the founder and CEO of crypto trading firm B2C2. This post is the third in a series of three that looks at the structure of crypto markets.

To trade financial assets, a variety of market designs are possible: those are called market microstructures.

Importantly, trading in a CLOB is entirely anonymous - or so one hopes - pre-trade and normally post-trade, too: the exchange sits in the middle of all trades.

On a single-dealer platform, or SDP, clients trade with one liquidity provider on a "Name disclosed" basis, since the dealer runs the proprietary platform and knows who is trading.

Takers are normally anonymous before the trade with disclosure of the counterparty to the liquidity provider after the trade.

Most participants do not know where the market is going; those who do are called informed traders.

Market makers have to balance the losses incurred against informed traders with the spread they earn from everyone else.

As explained in Part 1, market makers are also high-speed informed traders, thus a venue lowers its average toxicity by preventing the makers from taking.

EBS and Reuters, the primary CLOBs, lost market share to single-dealer platforms as the arrival of high-frequency trading firms in the FX market pushed banks to retrench in favor of direct OTC relationships.

Exchange market-making has become extremely competitive after the entry of big high-frequency trading firms in early 2018 while the technological cost of running a single-dealer platform - as opposed to the voice trading of yore - forced crypto trading firms to adapt.