Paradigm lines up exchanges, hedge funds as it aims to build the TradeWeb of crypto

Quick Take

  • Paradigm has lined up some of the biggest players in the digital asset space as it vies to build the TradeWeb for crypto
  • A new funding round will help the New York startup further build out its execution tools 
  • The deal comes as the options market for crypto continues to see growth

A New York startup vying to be at the center of the crypto derivatives market has lined up a group of crypto exchange and hedge fund backers as it expands its platform. 

Launched in 2019, Paradigm offers automated tools that allow cryptocurrency derivatives traders to execute options and futures trades. In a sense, the firm stands as the center of liquidity in the nascent options market, serving as a place where most large trading firms execute futures and options trades in size that then settle on exchanges like CME Group and Deribit.

Already, institutional trading clients — made up of both market makers and dealers — have traded more than $1.5 billion in various derivatives contracts through the platform to date. During certain trading sessions, activity on Paradigm has accounted for as much as 54% of total volumes in the market. 

As for the new funding, the firm added investors like Dragonfly Capital, Coinshares, New York Digital Investment Group and Digital Currency Group as well as exchange-operators like OK Group's investment arm, ByBit and Alameda. Paradigm co-founder Anand Gomes declined to share how much was raised in the round as well as the valuation of the company.

Gomes said the new investors will play a strategic role as well. To start, the firm will integrate with FTX, the sister company of Alameda, OKEx and ByBit. 

On the heels of the fundraise, the company is rolling out a new automated request-for-quote feature. On Wall Street, a request for quote (RFQ) is an automated feature that allows traders to execute a trade on a screen (instead of making a trade via voice). Paradigm's new product will enable traders to anonymously access aggregated liquidity from several venues rather than just one venue at a time. The update follows the launch of Paradigm's RFQ Building, which allows traders to configure trades to include options and futures in one trade. 

In a sense, the company is taking a leaf from TradeWeb, which operates a multi-dealer trading platform for the FX and bond markets.

I got options

Product enhancements aside, investors in the deal and market participants say the growth of Paradigm signals broader expansion in the crypto derivatives market and market infrastructure. 

"We have been paying a lot of attention to how infrastructure has been evolving," Dragonfly Capital's Haseeb Qureshi said in a phone interview with The Block. "Paradigm has a very obvious place in that story."

The options market, in particular, has witnessed breakneck growth since the beginning of the year. The size of the market stood close to $2 billion in June, in terms of notional open-interest, according to data provided by Skew. By comparison, that figure stood at $200 million at the start of 2020. Options offer investors a way to hedge their book or express a view on a market in a capital-efficient manner. 

Dragonfly's Kevin Hu said the growth of the options market could serve as a tailwind for Paradigm.

"Options are very underrepresented," he said, adding that there will be 20–40x growth in the size of the options market even if the overall derivatives market for crypto doesn't grow. 

Market participants in Asia will likely drive much of that growth. In addition to raising fresh capital, Paradigm will also make a big push into the region with its partners, according to Qureshi. 

"The majority of trading activity comes from Asia," Qureshi said. "We can help them go the distance."

Stuck in the middle with you

Paradigm's fundraising comes as a growing number of crypto market participants are looking to revamp their businesses to become full-scale prime brokers — essentially middlemen who sit between the market and investors. In a sense, Paradigm acts as an intermediary as well, providing a portal through which traders can leverage automated tools to execute trades across various venues.

Still, the firm's ambitions are not in serving as a one-stop-shop for all trading needs, opting to focus on the execution layer while leaving the settlement layer to the exchange and dealers. 

"Execution is a technology game. Where does my expertise lie: execution," Gomes said, adding:

"That's a much better solution for the customer since it offers choice both at execution and the settlement layer."

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