The Importance of Low-latency Trading for the Crypto Market
George Zarya, CEO of BEQUANT, offers insights into why the introduction of low-latency trading is so important for the crypto market.
The early days of crypto markets were heavily dominated by retail market participants and point-and-click traders. The market evolved and more experienced players entered the space. The high focus on systematic and algorithmic trading among the traditional financial community means that the very same strategies are now being employed across the very fast-growing cryptocurrency market. For these firms, their DNA is not just trading and speculation, but also technology.
In algorithmic trading, latency plays a vital role as speed is the key entity in executing a trade. In short, low latency leads to competitive prices for trade execution. For many firms, it was this lack of infrastructure that prevented entry to the market. As such, the introduction of low-latency solutions will not only facilitate the entry of well-established market participants from traditional markets but it will also improve the underlying quality of the crypto market by boosting liquidity and improving market fragmentation.
What should the crypto industry seek to implement?
The main barriers that the cryptocurrency market needs to overcome in matching the standards expected by institutional investors access to robust liquidity pools and improved infrastructure for high-speed trades with the lowest possible latency. Regulatory ambiguity is a huge issue. Although few jurisdictions have established mature regulatory systems in the cryptocurrency industry, it is nevertheless important for the majority to maintain a high level of corporate governance, in order to gain institutional trust. This can include robust Know Your Customer (KYC) procedures, as well as proper trade surveillance and market abuse monitoring.
The main barriers that the cryptocurrency market needs to overcome in matching the standards expected by institutional investors access to robust liquidity pools and improved infrastructure for high-speed trades with the lowest possible latency.
Education and awareness are areas where the market must also improve. The nuances of analysing crypto markets are very asset class specific and fundamentals are often disjointed from the prices seen on screens. The security of assets has also become of paramount importance, as increasing cases of exchange hacks are a major source of concern for many investors. Surprisingly, however, very few exchanges offer industry standard Financial Information Exchange (FIX) connectivity despite this currently being a significant shortcoming of the crypto industry for many institutional clients.
Why low-latency trading is high on the list of investors’ needs
The lack of industry standard connectivity in the majority of cryptocurrency exchange platforms is becoming increasingly apparent, especially as low-latency options begin to gain more prevalence. Traders looking to exploit price discrepancies across different trading venues are experiencing higher levels of competition in order to enhance network latency and tick to trade responses.
More and more, the solution to this is colocation and hosting at data centres in major financial hubs like New York, Tokyo and London. As colocation becomes more widespread within the crypto industry, the market will eventually demand Best Execution and Best Bid Offer quotes that require robust network infrastructure and low-latency connectivity across major liquidity pools.
Digital asset exchanges looking to tap into the increasing influx of institutional investment must ensure that product development is built using the best elements of traditional high-speed electronic trading. Partnering with time-proven custody solution providers and large liquidity pools within the market can offer the best of both worlds.