Agnostic on Crypto BUT Anti Unregulated Markets-- Market Makers Are The Big Winners
"Just bring us more chum!"-- that is a direct quote from a buddy on the board of directors for one of the largest crypto market makers on the planet. Make no mistake, what the crypto market makers are doing is 100% completely legal-- in an unregulated market. Much of what the crypto market makers do so well, from hidden silos in Dubai, Singapore, and other tax-advantaged and regulation-free havens, would result in mega-fines, bans from trading, and likely jail time if the same market-manipulating strategies were deployed in U.S. regulated markets.
How much can they possibly be making? Last week, one of the very few publicly-traded market makers, VIRTU Financial (NASD: VIRT) blew the doors off inflated Street expectations:
The question is fairly straightforward: "As an investor, would you rather bet on the casino or the gambler?" In reality, in an unregulated market, re-write that to, "Who's going to win?-- the guy dealing three card monte in an alley on an oil drum, or the half-drunk tourist that steps up to try their luck?"
There are completely regulated exchange-traded crypto futures contracts (futures being a market in which I have 30 years of history). The problem is the futures contracts are 'fruit of the poisonous tree'-- and likely why there is NO institutional interest or activity. If regulated futures are tethered to unregulated underlying index or instrument, the trader's cash is completely safe through the exchange financial safeguards. The safety of the cash has NOTHING to do with the integrity of the underlying. Many futures veterans looked quizzically at the listing of crypto futures for just this reason: how could there possibly be a regulated future with a price derived from an unregulated underlying? A classic comment from a retired grain trader: "If we list futures on WWE wrestling, I'm gettin' back in the game..."
Over two years ago, I made a bunch of comments on the 'regulated versus unregulated' problem foreseen in the crypto market. I was immediately chastised as a crypto-hater. I am not. In fact, I really like the prospects IOTA and tangle encryption-- not as an investment but as an integrated payment technology potentially. As a nod to the many that have voiced concern for bringing 'investors' (especially non-institutional) into unregulated markets, below is an article from Jan 2015.
No part of what I've written is intended as investment advice. I own VIRT and XPO as my way of 'investing' in crypto-- really, looking to get a piece of the fleecer's action and the inevitable need for highly defended wallets for those with real money involved. My thoughts and writing are no reflection of any employer, employee or anyone but myself.
Managing Director at Sapphire Capital Group
6 年It's that time of year again....let's light 'em up! Hope all is good with you John - and of course, thanks for all the good articles along the way!
Head of Finance and Operations | Blockchain Analysis, Operations
6 年Market makers are experts in risk management. They excel in a new asset class because they use their existing risk tools. It is an extension of their business.
I produce and facilitate meetings to help business leaders identify and overcome blind spots in their decision-making.
6 年Great post. The context of the unregulated underlying gets left out of most crypto discussions/posts/articles I've seen.