A conversation with the man building Coinbase's new matching engine

Trading volumes have been up across exchanges in the digital asset market over the past week as cryptocurrencies make a roaring comeback. And that's brought on some déjà vu for Paul Bauerschmidt, product manager for Coinbase Markets, the Chicago team responsible for building out the San Francisco-based firm's new matching engine. 

In an interview with The Block, Bauerschmidt noted that recent volatility hearkens back to the not-so-halcyon days of 2017, when the exchange — and its competitors — were under pressure to stay online because of heavy traffic. Bauerschmidt joined Coinbase in 2017 after spending a great deal of time in traditional financial services, where he worked at derivatives giant CME Group and Eris Exchange, the precursor to crypto exchange ErisX.

With that experience under his belt, Bauerschmidt was brought on to form a team that would build out Coinbase's next generation matching engine and work on other improvements to make its infrastructure more comparable to Wall Street. It is set to go live in June, according to one source. 

In the wide-ranging interview, Bauerschmidt and The Block's Frank Chaparro dove into the following: 

• Recent market structure improvements at Coinbase; status update on the new matching engine
• Whether Coinbase is worried about being beaten by rival exchanges that are also improving their infrastructure
• The potential for a "Coinbase speed bump" and new order types for traders

The following has been edited for clarity and length.

Chaparro: It has been over a year since Coinbase started working on this new platform — how is everything coming along?

Bauerschmidt: I think from a timing perspective we're now in a pretty great place. We're looking to release something later this year. We want to make sure that we are very, very careful with how we do the migration and how we engage with the community. To make sure it's a smooth and healthy migration, so it's something we're going to be very prescriptive and careful with as we do the upgrades.

Chaparro: Coinbase has been rapidly adding new assets to the platform. Have there been any improvements to that process?

Bauerschmidt: Interestingly, a great deal of our work has been around not just the matching engine itself, but around the support infrastructure with adding new blockchains, or new assets. We added for example Stellar and XRP and with both of those you have account fields that you have to incorporate throughout your entire infrastructure to be able to support correctly. So it's much more about the idiosyncratic nature of each particular new asset you're adding.

In addition to making the engine itself more ready to add more assets, one of the things we just rolled out, three and a half weeks ago roughly, was some market protection features I'm pretty excited about. One of them was protection points on market orders, so you don't have any more fat finger risks, where somebody puts in an order that is just far too large. 

Chaparro: In terms of new market features, crypto is known for supporting only a paltry number of order types relative to the traditional world. I am pretty sure some exchanges only support basic limit and market open orders. Is Coinbase working on adding to the number of order types its engine can support?

Bauerschmidt: This is near and dear to my heart. Coming from the CME Group, which is the big derivatives exchange, we had a gazillion different order types and the matching algorithm was very, very complicated. I think crypto will absolutely mature into a place where more sophisticated order types exist, natively within the engine. For example, in equity markets an OCO order is very, very common — where you put in basically a pair order where if one gets triggered the other one is automatically canceled. I would expect order types like that to start entering our vocabulary collectively as the various exchanges are able to support them.

Obviously we can't make any progress here, we're doing the primary migration, the exchange platform, first, which will be largely feature-comparable, but we're positioning ourselves over time to be much more sophisticated about how we think about order types and algorithms.

Chaparro: Coinbase stands out among some of its competitors inasmuch as you guys are going solo in building this out. Others, such as Bitstamp, are white-labeling other firms' technology. SeedCX recently went online, the first of the many new institutional exchanges. Are you worried about competitors eating your lunch, luring in volumes, before you're able to go to market?

Bauerschmidt: I'm not too worried about the competitive landscape. Some of the existing exchange platforms out there, the ones you named but probably five or six others, we've spoken to all of them. There were aspects of current market environments that are hard to adapt to crypto. Crypto is unique for a bunch of different reasons. One is that it has very, very granular prices and quantities, they can go down to any decimal, that's unique. The other is that it is operating on a 24/7 basis, there is literally no downtime, and that's distinct among financial services. Everyone has downtime at the end of the week.

The third thing is that the number of active customers in a given marketplace in crypto is probably scores of magnitude greater than it is in other markets. 

The number of unique accounts, 24/7 trading, and granularity, were some of the key components that led us to the decision that a build option was the right call for us. Having said that, coming from traditional financial services, this is a cornerstone platform for us for the way we look at building this business for the foreseeable future. I think it is really important to do this right and to have the highest possible percentage of control over it as possible. So I'm not too worried about timing the market so much as I'm worried about doing it right and building the right platform to be scalable for the future.

Chaparro: In 2017, outages were common place and I imagine it probably scared people away from investing in this market. How do you think upgrades you made, and upgrades you will make, will impact this market, in terms of confidence?

Bauerschmidt: Yes, I was in the room in 2017 at Coinbase at the end of that year, for the all-nighters, watching the world go crazy. And we had conversation with the team Monday morning, Tuesday night [about] 'boy does this remind you of those times.'

I think we're really well positioned right now. And I want to be able to do that at scale. From my perspective when I was at CME Group, whenever we would reduce latency, or increase the determinism of the underlying platform, we would see customers responding quickly and you could observe it in the way the market was quoted, the numbers of trades that occurred, and the numbers of traders. So I think increasing the health of this marketplace is paramount and that will increase the resiliency of crypto globally. This transition from web technology to true low latency engines is a mega transition that will materially change the way crypto works in the future. 

Chaparro: Putting my market structure reporter hat on, I can't help but think of things like colocation and speed-bumps. Are their any plans for supporting colocation for high-frequency trading firms? 

Bauerschmidt: I want to be careful here because I have a personal attitude that a level playing field is paramount and I want to make sure that everyone has the same opportunities across the board; to be able to get access to our markets and to have the same ability.

Chaparrot: How about a speed-bump then?

Bauerschmidt: There are many strong opinions about that, that's for sure.

Chaparro: Are you guys thinking about implementing one though?

Bauerschmidt: I don't know that if you look at this data, that they're particularly effective for those stocks, for the record. The way I look at it is that you can increase the determinism for the primary liquidity providers, the net result is that consumers, the true retail users, will fundamentally get better prices because it'll increase liquidity providers' confidence in using your market and they will be able to provide a tighter bid-ask with a higher quantity. The nature of what we're building here will certainly have attributes of a mature marketplace, it will have different types of actors available, we see it in the systems of our competitors today where they're offering these sorts of colocation-type facilities, so I think that is definitely within the scope of what we're aiming at here, but the net result is better prices to end users and more value to our customers.