Crypto hedge fund shutdowns are leading to layoffs in the OTC world

Crypto winter has finally found its way to a corner of the digital asset market known for its high margins: over-the-counter trading. 

In recent weeks, two over-the-counter trading operations have run into significant headwinds — with one firm shutting its desk altogether. 

CMT Digital, a Chicago-based firm, has laid off more than 10 individuals from their team, according to several people. Meanwhile, Kenetic has shut their advisory and over-the-counter trading business, according to a source. 

"While we did have a single round of layoffs on our trading and technology team at the beginning of Q1, we are deeply committed to crypto trading with an active crypto OTC and proprietary trading desk," Colleen Sullivan, head of CMT Digital, said in a statement. "Additionally, we remain heavily involved in the growth of the crypto / blockchain industry. Our venture team has made 13 investments in operating companies and four investments in two fund managers."

CMT Digital is known for punching above its weight when it comes to venture capital investing, having been involved in notable deals including the fundraises of Bakkt, ErisX, and Circle. Sullivan is also known for her market structure expertise. Still, the market for over-the-counter trading is bloated with desks, some experts say. Over the last year, a number of exchanges have launched OTC desks including Kraken and Coinbase, to name just a few. One OTC insider told The Block that a number of hedge fund counter parties his firm traded with have "fallen off."

"Honestly, anyone who raised more than 5-10 bucks for a crypto trading strategy in spot market or ICO token was just so absolutely full of shit," one trader said of the funds shutting across the industry.

Furthermore, volumes across OTC and exchanges have suppressed as interest in the market has waned. OTC desks are known for charging high fees for helping counter parties execute a trade, and during the bull market of 2017 desks were making trades over $100 million.

For Kenetic, things are far more severe than at CMT Digital, according to sources familiar with the business. The firm has shut down its OTC desk, which was run by Benjamin Roth. It also shut down its advisory business. The firm implemented high- and medium-frequency principal strategies, according to its website. It was cofounded by Jehan Chu and Lawrence Chu.

"We are confident the market will eventually recover, but for now we are focusing our energy in three areas, Proprietary Algo Trading, Structured Finance for Token Projects, and investing out of a new VC equity fund," Chu said in a statement. "We also remain committed to adding value to our extensive portfolio of investments including trading platform Caspian and STO exchange Sharespost."

There's a glimmer of hope for CMT. The firm said it is in the process of launching CMT Digital Labs, which will test out new technologies tied to digital assets. Elsewhere, Cumberland and B2C2 have announced they have been able to build new interfaces to allow large traders to engage with them electronically — similarly to how traders in equities engage with one another. Even as volumes shrink, expectations for how OTC desks operate are increasing, Seed CX CEO Edward Woodford told The Block.

“We have seen a notable increase in the OTC crypto industry’s appetite for electrification through single-dealer networks and trading platforms, which is an evolution that we’ve seen in FX in the past."