Crypto Trading: Four Reasons Everyone Needs A Broker-DealerDecember 9, 2018
An ever-increasing number of crypto companies (such as Coinbase, Uphold and Peter Thiel-backed Tagomi Systems) are acquiring broker-dealers or registering themselves as a broker-dealer for regulatory oversight by the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC).
In light of this trend, what differentiates broker-dealers from regular crypto exchanges? And which advantages do they bring to crypto trading?
What is a cryptocurrency exchange?
Traditional crypto exchanges such as Binance, Coinbase, Poloniex, etc. work similarly to a stock exchange. Buyers and sellers place orders which are cleared using an order-book system, which defines the market price. The exchange acts as match maker and charges a fee for each completed transaction on their platform.
What is a cryptocurrency broker-dealer?
With crypto broker-dealers, your orders aren’t limited to one exchange. They’re traded via a platform that connects to multiple exchanges, allowing the broker-dealer to ‘shop around’ for the best price. Broker-dealers facilitate trades on behalf of their customers, interact with the exchanges and monitor the transaction from start to finish.
Broker-dealers allow crypto traders to…
The SEC shows strong signs that most ICOs (the IPO of crypto) currently being launched do not pass the Howey Test and will be deemed securities. This means that ICOs and most of crypto could be treated as a securities contract, as opposed to a tradable commodity. A registered broker-dealer is capable of offering securities (digital/traditional or blockchain) under the oversight of the SEC and FINRA. The SEC currently recommends cryptocurrency exchanges register as broker-dealers operating an Alternative Trading System (ATS) — which allows them to work outside the traditional exchange network. These approvals, along with any infractions, are monitored by FINRA and available for on BrokerCheck.
Arbitrage — Crossed Order Book
In times of market inefficiency, the order book can cross producing an arbitrage opportunity. This means it is possible to purchase at a lower price than you can sell. A broker-dealer can provide traders visibility of these price differences and take advantage of them by routing orders to the best buy & sell prices for execution. Broker-dealers can enable their retail customers to take advantage of arbitrage opportunities which are currently exclusively accessible to hedge funds using sophisticated automated trading systems.
Having your assets sitting on the exchange is referred to as captive capital. When this occurs, the traders is limited to the selection and pricing available at the exchange their assets are held. Working with a broker-dealer that supports custom pairs (aka synthetic pairs), they can eliminate the need to split a trade up into multiple legs. Custom pairs are very useful in moving between alt coins and saves the trader from additional transactions (i.e. Token A -> Bitcoin -> Token B). In this scenario, the BD can process the order as Token A/Token B, even though the pair doesn’t exist on any of the centralized exchanges.
Even the largest crypto exchanges are prone to price slippages if large trades are placed at the market. The reason for this is due to the order being executed against a single order book with insufficient depth making it difficult to move large trades without the use of limit orders or manually entering smaller segmented orders over time. Traders working with a broker-dealer, has the option to route large trades across various venues (exchange, OTC, dark pool) for simultaneous execution at the best price. This additional flexibility typically allows for a higher quality execution and great anonymity for the trader reduce negative market impact on the trade.
1Konto (German for “one account”) is in process of becoming the first to connect traditional and digital assets through one-click trading. We focus on increasing adoption of digital assets, reducing friction in ownership and bridging the new crypto world and the traditional financial markets all at the best price via our proprietary algorithm.
About the Author:
Edwin Handschuh, co-founder and CEO of 1Konto, is responsible for managing overall operations and resources of 1Konto. Prior to starting 1Konto with his brothers, Ed was in wealth management at Wells Fargo Advisors where he worked primarily with high net worth individuals on growing, managing and protecting their assets. He achieved great success in this role by understanding what clients required to make sound investment decisions, and identified their problems and solutions in advance.
Ed’s primary interests for the last 15 years has been within the financial markets and technology space. The inner workings of markets, psychology, politics and the role tech plays in all of the above, has always fascinated him. His knowledge of these topics assisted him in his prior job, but are more important today and moving forward. It’s allowed him to identify the cryptocurrency markets need for a broker-dealer in the space and the comfort of navigating the broker-dealer regulations to make it happen. The management and responsibility aspect of his financial advisory role made him confident in his abilities of setting a vision, communicating that vision and putting the team together to make it a reality. Realizing that he enjoyed assisting people and making their lives better by securing their retirement, Ed felt he could impact more people in a bigger way through 1Konto.
Ed graduated from Drexel University with a Bachelor of Science and finance
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