Digital currencies

Hong Kong-based cryptocurrency broker taps ‘block trade’ demand from institutional investors

The crypto broker says hedge funds and high net worth investors are trading cryptocurrencies off-exchange in sizes of US$2 million per order

PUBLISHED : Thursday, 22 February, 2018, 7:34pm
UPDATED : Friday, 23 February, 2018, 11:53am

Cryptocurrency brokers have started offering off-exchange trading venues for large-sized orders of digital currencies in ways similar to “dark pools” offered by their equities broking counterparts, as the new asset class increasingly attracts institutional investors.

Octagon Strategy, the Hong Kong-based cryptocurrency broker, said in recent months it has seen a surge in institutional investors’ demand for trading digital tokens ranging from US$1-2 million per order. Octagon expects such institutional interests will help push the market capitalisation of the nascent digital asset class to nearly US$1 trillion globally by the end of 2018, from US$822 billion in January this year.

There are over 1,500 types of cryptocurrencies globally.

Wayne Trench, newly appointed chief executive of Octagon, said it was now processing block trades of major cryptocurrencies, such as bitcoin Cash, Ripple, bitcoin, Litecoin and Ether. In December alone, Octagon’s platform transacted US$1.5 billion in cryptocurrency trades.

Block trading, which represents a big block of buy or sell order of securities privately negotiated and facilitated by brokers and is a key equities trading avenue for institutional investors who often do not want such sizeable orders to result in unfavourable share price movement, is now actively sought after also for cryptocurrencies, he said.

Similar to investment banks and agency brokers that offer “dark pools” for equities trading, in digital currency too such block trading is dependent on the brokers’ own network and knowledge of where the potential buyers and sellers of tokens are.

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However, as cryptocurrencies remain largely unregulated and perceived as a nascent asset that have not yet been stress-tested in times of a crisis, often these crypto brokers are set up by former investment bankers who have previously worked at the banks’ electronic trading desks.

In recent months, Trench said his firm has executed crypto block trades for hedge funds, high net worth individuals, family office and private banks in Asia.

He expects institutional interest to grow, as more measures are expected this year to regulate cryptocurrency transactions that would hopefully encourage more institutional investors to include cryptocurrencies as part of their investments.

“Most buy side firms still prefer to trade in block size … because quantitative research suggest that in the long run, if you could execute a block trade at the time an investment decision is made, your slippage will be far better than you execute on exchange,” said Trench.

Slippage is the divergence of the actual price that the shares are traded away from the expected price of the investors.

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Trench said cryptocurrency trading is going down the same evolutionary path as equity trading, in that there will be increasing demand from investors to use electronic trading to access digital currency exchanges, while at the same time, institutional investors will prefer trading in blocks in the over-the-counter market.

That is because even at the top cryptocurrency exchanges, trading volume has been thin, caused by the fact that trading liquidity is fragmented across various exchanges currently. Meanwhile, investors also have to be exposed to the security risks of holding their balances of crypto at these exchanges.

Aside from offering block trading liquidity pool, Octagon Strategy also direct clients’ trading orders to

“a handful of” digital currency exchanges using various algo trading technologies.

Although he did not specify the exchanges, leading cryptocurrency exchanges include Hong Kong-based Bitfinex, San Francisco-based Gdax and New York-headquartered ItBit, which also has office in Singapore.

For block trading of cryptocurrencies, Trench said the firm has established relationships in place with digital currency miners, and other digital currency brokers, to enable it to access and trade block sized digital currency at better prices than what is available across the numerous fragmented exchanges.