How Institutional Crypto Traders Can Overcome the Top 3 Barriers to Global Execution

 

By Amit Khandelwal, Head of Execution Services, Apifiny

Digital asset traders today face a double-edged sword. 

Increasingly fragmented crypto trading markets create significant price disparities that can lead to arbitrage opportunities. At the same time, this market fragmentation also makes trade execution inefficient and challenging. However, traders now have a new pathway available to them that simplifies this complicated situation and helps them to earn outsize returns. 

Discovering this new pathway starts with asking, “What is the price of bitcoin right now?” 

That may seem simple to answer: head to a reputable cryptocurrency exchange and check the last price. But it’s not that easy. Stopping there could result in a wrong answer leading to financial decisions that cause losses. 

Every Exchange for Themselves

Why? Because each digital asset exchange today stands as an individual, isolated marketplace. In US exchanges, for example, someone who only has an account at Exchange A cannot access Exchange B’s price and liquidity. Traders with accounts on multiple US exchanges see a price difference for bitcoin between them at any given moment. 

The reason for the discrepancy is the same, regionally and globally: market fragmentation forces these far-flung exchanges to quote bitcoin in their local fiat currencies, with each exchange having a unique supply and demand. That’s why bitcoin’s value across global exchanges looks significantly different, especially when there’s high volatility. 

This fragmentation sounds like a logistical problem, but it also leads to three uncaptured opportunities:  

  • Cross-exchange arbitrage 
  • Organic liquidity from other regions
  • Strategies based on more reliable, normalized market data and signals 

Institutional traders may be running any number of trading strategies such as pairs, momentum, mean reversion, long/short, swing, smart routing strategies, and benchmark and liquidity seeking algos. However, since bigger price differences exist in crypto trading due to market fragmentation, strategies call for accurate pricing information and sufficient liquidity to execute efficiently. The more exchanges that institutional traders have accounts at today, the more accurate their price information will be and the more liquidity they can have.

Execution Roadblocks Result

Traders deploying these strategies must currently deal with three requirements, each of which can be roadblocks to efficient execution.  

Accounts with multiple exchanges – Setting up multiple accounts can lead to very high legal expenses from multiple legal agreements, onboardings, and KYC processes. Operational expenses can also balloon from the need to establish, manage, and update APIs for multiple exchanges. Furthermore, model testing requires infrastructure to be in place with each exchange. 

Cross-exchange transfers required – Many trading strategies require simultaneous transactions on different exchanges, often requiring a transfer or deposit if additional capital is needed for a trade. For example, buying at $9,000 on Exchange A, and selling at $9,200 on Exchange B requires a purchase on Exchange A and a transfer to Exchange B before the sale. However, cross-exchange transfers are challenging today because fiat transfers take 2-3 business days (on average), and crypto transfers can take up to an hour. Several market opportunities can be missed as capital is “on the sidelines” while being transferred or deposited. This is why institutional traders must maintain reserves on multiple exchanges to capitalize on every opportunity, which is another roadblock.

Holding reserves and managing multiple exchanges – To execute common strategies, reserves must be held on multiple exchanges, rendering capital unusable while transactions settle. This reduces capital utilization and return on capital. Managing multiple exchange accounts also brings increased legal expenses, plus high developmental and operational expenses tied to multiple APIs. 

Combine these obstacles and it becomes clear why, despite all of the opportunity from fragmented markets, achieving high profits remains challenging. 

Defragging the Digital Asset Marketplace

The solution lies in simplicity. 

Innovators in the space are working towards a new kind of execution platform. It should provide access to global liquidity from the world’s leading exchanges via a single account and API enabling trading multiple asset pairs, lower fees, and instant reallocation between sub-accounts. 

If institutional traders could go through just one deposit and onboarding process–instead of dozens–they could immediately reallocate assets across exchanges and start trading. Traders who onboard with a one-account-global-access platform can conquer some of their most pressing execution challenges: one API and one onboarding instead of many, higher capital utilization, and access to more trading opportunities. All with trading fee discounts.

Traders must implement functional global trading strategies in a highly fragmented and distributed crypto market with many leading exchanges to execute truly scalable, global strategies. Ideally, they could also use normalized market data and trading APIs to overcome the individual quirks of today’s various offerings. Instant reallocation on the trading platform itself is also highly desirable since managing assets across different exchanges can be a burden.  

Equally important is this type of execution platform could reduce commissions. The provider could negotiate lower fees due to the large trading volume accrued on those exchanges.

Put plainly: a global execution platform would deliver higher trading profits and return on capital.

From One to Many

With these innovative efficiencies built-in, it’s easy to see the benefits of a single API / single-account global execution platform. 

Having just one onboarding process represents a huge time and cost savings. Multiple APIs would be replaced by a single one, while a normalized market data feed eliminates the need to have one feed for each exchange. 

Transfers between exchanges would become instantaneous, instead of taking the now-standard 20-60+ minutes. While separate deposits and withdrawals for each exchange are the norm, a single-account execution platform enables deposit and withdrawal from one account, with transfer and rebalance via a single API.   

This brave new trading world is within reach. It starts with significantly reducing the headaches from onboarding with multiple exchanges globally. The benefits of a single-account execution platform expand from there, so institutional traders can spend time on what matters most: their alpha and trading strategies.

Amit Khandelwal is Apifiny’s Head of Execution Services and Product Manager for Apifiny Connect