The exchange evolution is in swing these days.
First, the market had exchanges set up for goods and services. Then under a Buttonwood Tree the world got its first organized stock exchange. Then came bond exchanges, commodities exchanges and more recently myriad cryptocurrency exchanges. But back in 2015, the creation and/or formation of a Bitcoin exchange from a former Goldman Sachs trader made headlines.
LedgerX, the brainchild of Paul Chou, LedgerX is the first federally regulated exchange and clearing house to list and clear fully-collateralized, physically-settled bitcoin swaps and options for the institutional market. The U.S. Commodity Futures Trading Commission (CFTC), which regulates virtual currency derivatives, oversees LedgerX’s registration as a swap execution facility (SEF) and derivatives clearing organization (DCO).
The LedgerX management team now comprises Goldman Sachs, MIT and CFTC alumni, who bring financial expertise, technical talent and regulatory experience to the firm. Ananda Radhakrishnan, former Director of the CFTCs Division of Clearing and Risk and current Vice President of the Center for Bank Derivatives Policy at American Bankers Association, and Carl Mahler, Partner at Gelber Group, currently sit on the LedgerX Board of Directors. Mark Wetjen, Managing Director at Depository Trust & Clearing Corp (DTCC) and former Commissioner of the CFTC, currently sits on the board of directors of Ledger Holdings Inc., the parent company of LedgerX.
On May 22, 2017, Ledger Holdings Inc. announced the closing of $11.4 Million in Series B financing led by Miami International Holdings Inc. and Huiyin Blockchain Venture Investments. Early investors include Google Ventures and Lightspeed Venture Partners.
Quite a feat to be sure. The exchange has branched out va its LedgerX PIT (Professional Trading Interface) which enables placing orders on the Web Trading Interface through the price/time central limit order book or our bilateral negotiated trading system, or connect through the API.
Traders can now trade Digital Options, buy and sell Bitcoin and chat directly with LedgerX participants and negotiate on price and size.
More recently, the exchange unveiled the LedgerX Halving Contract – the first fundamentally new derivatives contract unique to Bitcoin.
According to the firm, LedgerX is the first and only US-regulated derivatives platform to settle a variety of Bitcoin derivatives for its clients – but so far theyve done is more of a permutation on existing financial ideas than an evolution. Swaps, options, and futures are all well-known quantities in the traditional financial world.
Enter the the LedgerX Halving Contract (LXHC) – a binary option that settles to something unique to Bitcoin – when the next halving will happen. This contract will allow you to get a fixed payoff if the next halving block (#630,000) happens before a certain date and time. If the block is discovered after, the contract expires at zero. The result is an extremely clean binary payoff that is verifiable by all participants – a great demonstration of the value of a public blockchain.
Binary options have traditionally been associated with gambling events. Most financial issues are near continuous – stock prices, oil prices, weather temperatures, etc. behave as such. Binary outcomes tend to be whether someone wins an election or not, or whether a team wins the Super Bowl or not. Even financial binary contracts are often shunned by Wall Street desks – traders managing their gamma have difficulties with the risk-reversal situations that binary options present.
But Bitcoin is unique in that there is a fundamental economic risk that is binary. To give an analogy, imagine you are an oil producer such as Exxon Mobile and know that one day in 2020, the number of barrels of oil you extract will go down by half, forever. But youre not certain which date that will be. This would materially impact planning for investment and operations. Bitcoin miners face this exact risk approximately every 4 years for the block reward that they earn.
The date the actual block will occur will also intrigue speculators and liquidity providers, as its a function of hardware advances, electricity costs, and market dynamics. There will be plenty of interesting opportunities to analyze and profit from, and we will be listing several different contracts around the currently projected date. For those who know binary options, this range will also allow us to derive another value – but this is an announcement in and of itself that well go into detail a few weeks from now.
LedgerX has now posted details and circulated contract specifications to market participants here. After a year of successfully listing traditional derivatives contracts on Bitcoin, were proud to add something unique to this asset class to our stable of offerings.
Not bad for a just a few years. And just wait until institutions begin to enter the market en masse.
The following article originally appeared in the February 2015 edition of Traders Magazine
Ex-Goldman Trader Readies New Bitcoin Exchange
By John DAntona Jr.
A new federally regulated exchange designed to trade virtual currency is one step closer to becoming a reality.
Paul Chou, a former Goldman Sachs trader is readying LedgerX, a fully regulated Bitcoin derivatives exchange and clearing house. While at Goldman, he was responsible for developing, trading and risk managing algorithmic equity trading strategies for U.S. and Japanese markets. Also, he developed a set of cross-asset strategies and devised a method to unify and optimize the trade flow across hundreds of trading algorithms.
Prior to Goldman, Chou delivered trading and spread-risk tracking tools on projects for Citadel Investment Group and Morgan Stanley.
Chou, chief executive officer of LedgerX, is designing the exchange and currently has filed registration papers, bringing the bourse one step closer to reality. LedgerX’s registration, filed with the CFTC, is open for public comment until Friday, January 30th. On December 15th, the CTFC requested comments on the LedgerX submission.
If approved by the CFTC, LedgerX would be the first federally regulated Bitcoin options platform and clearing house to list and clear fully-collateralized, physically-settled Bitcoin options for the institutional market. LedgerX has also applied for registration with the CFTC as a swap execution facility and as a derivatives clearing organization on September 29, 2014.
LedgerX is backed by several high profile investors such as Google Ventures and LightSpeed Ventures. Also, Jim Newsome, former chairman of the CFTC and former chief executive of NYMEX, and Tom Lewis, former CEO of both Ameritrade and Green Exchange, currently sit on the LedgerX board of directors.
Chou told Traders that he is currently working with legal, tax, audit, surveillance and technology companies. Simultaneously, to build a Bitcoin derivatives market, he is bringing together corporations seeking to hedge their Bitcoin exposure and financial institutions searching for trading and investing opportunities in Bitcoin.
According to Chou, more than 80,000 entities accept Bitcoin, including brand names such as Dell, Expedia and PayPal.