An innovative new world is emerging for Crypto Prime Brokerage

In the wake of the recent  $4.3 billion settlement by the world’s largest exchange, the crypto prime brokerage landscape is confronting pivotal challenges in 2024. Traditional crypto prime brokerage models, reliant on sub-account renting are faltering amid stringent KYC/AML regulations, and presenting further challenges to trading firms in the market already experiencing fragmented liquidity, reduced lending services and a lack of universal infrastructure standards.

The key to addressing these perennial challenges while keeping abreast of regulatory expectations lies in the evolution of a more responsive next-generation technology stack.

Systems Upgrade

Smart Order Routing (SOR) technology innovation is revolutionizing crypto prime brokerage. It functions as a 'Chinese wall' between exchanges and trading firms. This innovation allows traders to access compliant and capital-efficient trading, eliminating the need to access exchanges' trading APIs and moving beyond the traditional prime broker model. When this advanced SOR is coupled with data-center co-location and latency-optimized technology, traders can achieve extremely low latency. This not only rivals elite HFT firms but also enables low execution cost, compliant, and low-latency trading across multiple trading venues such as Binance, OKX, Bybit and others, effectively harnessing fragmented liquidity and allowing firms to access unique trading opportunities.

The evolution continues towards seamless market access, enhancing capital efficiency, all while taking advantage of off-exchange settlement and lending facilities. Such innovation will also enable traders to benefit from potential netting effects, which will require less margin capital to be deployed at the exchanges, thereby reducing counterparty risk and improving capital efficiency even further.

Global Head of Prime Brokerage at Matrixport, Daniel Egloff says: “Trading firms will be able to have unified access across spot, perpetual swaps, and futures markets, all with minimal microsecond latency. This will significantly benefit firms running cross-exchange, statistical and funding rate arbitrage, along with basis traders and market makers requiring rebates and low-taker fees.”

API Standardisation

The stark difference in API use between Traditional Finance (TradFi) and crypto highlights a significant gap. Every crypto exchange built their own specific trading and market data APIs, not following any standards, burdening traders with complex integrations. On the other hand, TradFi benefits from standardized protocols like Financial Information eXchange (FIX), ensuring efficient, streamlined operations. FIX's adoption across TradFi demonstrates its effectiveness in facilitating seamless communication and reducing technical overheads, a contrast to the fragmented API landscape in digital assets.

This divergence underscores the need for standardization in the crypto space. Embracing protocols like FIX could simplify operations, attract more TradFi participants to crypto, and enhance the efficiency of the crypto infrastructure.

An Innovative New World

As the market evolves, it’s time for prime brokers to move beyond the primitive model of renting out sub-accounts which does not align with the ever-evolving, fast-paced crypto trading market. The brand new world of crypto prime brokerage, enhanced by technology, will enable traders to quickly adapt to hurdles and guidelines in an ultra-fast, capital-efficient, low cost and convenient manner — to take maximum advantage of trading opportunities.

This post is commissioned by Matrixport and does not serve as a testimonial or endorsement by The Block. This post is for informational purposes only and should not be relied upon as a basis for investment, tax, legal or other advice. You should conduct your own research and consult independent counsel and advisors on the matters discussed within this post. Past performance of any asset is not indicative of future results.