RULEMATCH Spot On – Time for Prime

With Michael Higgins

12 June 2024

26 min read

True prime brokerage in crypto and digital asset markets has been a missing piece of the puzzle for some time. Now that the largest trading firms in the world are looking to do business in the space, the need for cross-asset margining, reduced credit risk and broad market access – as well as highly-regulated, secure partners to support this – is more important than ever.

In this episode, RULEMATCH Spot On hosts Michael Higgins, Global Head of Business Development at Hidden Road Partners. Michael has extensive experience in trading and financial markets and served as Vice President at FXCM Pro and Managing Partner at Coronam ec Limited before joining Hidden Road Partners in 2019.


Episode show notes:

(00:41) – Intro and the personal backstory with Hidden Road Partners

(4:55) – Understanding (real) prime brokerage in crypto

(6:33) – The issues with vertical vs horizontal market participation

(7:10) – A prime broker’s actual role

(9:20) – Clients – the largest trading firms in the world

(10:05) – How crypto markets will improve with prime brokerage

(12:28) – Current demand for major crypto assets and dollars

(13:51) – Counterparty risk and conflicts of interest

(15:26) – Dealing with risk at Hidden Road Partners

(16:50) – Development of tri-party, off-exchange solutions

(19:00) – Standardization with clearing/settlement and ISDA as an example

(19:59) – The sticky question of settlement’s future in crypto

(23:14) – The “mish-mash barrier” to institutional adoption

(24:16) – The speed of change in crypto market structure

(26:33) – Advantages and disadvantages of liquidity fragmentation in crypto

(29:54) – The growth of CLOBs and other market models – and TCA coming to crypto

(31:49) – The (future) dynamics of futures vs. spot in crypto

(35:30) – Hidden Road Partners admission to the CME

(38:16) – Why “regulatory-first” is important

(41:08) – What to look out for…


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Episode transcript:



I’ll be very brief on it – clients, they’re the largest trading firms in the space.

They’re the largest trading names coming from TradFi into this exciting market.

Define the clients, the largest brokers, both institutional and retail brokers, proprietary trading firms, hedge funds, asset managers and there’s a few banks on the platform already.

And again, in partnership with folks at RULEMATCH, we’ll likely interact with much more on the banking side.





Hello and welcome to another episode of RULEMATCH Spot On, the only podcast focused exclusively on the institutional crypto and digital assets industry.

I’m your host, Ian Simpson. And if you want to know what banks, hedge funds, asset managers, and in this case, prime brokers are doing in the crypto space – and how they’re doing it, this is the place for you.

And now to our guest. Today we have Michael Higgins, Partner and Global Head of Business Development at Hidden Road Partners.

Hidden Road describes itself as a global credit network for institutions with services across prime brokerage, lending, financing for FX, precious metals, and of course, crypto and digital assets. Mike, joining us from London, welcome to RULEMATCH Spot On.



Thanks for having us, Ian.



Great. So, if you don’t mind, I’ll start with a little personal question. I imagine about five years ago before you joined Hidden Road, somebody, at some point, I don’t know exactly who or when, came to you with a pitch about Hidden Road and what it was going to do.

And I’d be interested to know what that pitch sounded like and what about the mission or the focus of Hidden Road actually resonated with you.



It’s a long story, but it’s a good question. So let me take that one. So, prior to joining Hidden Road, I spent just shy of 20 years in electronic trading, multi -asset background and bulk of the time spent in the foreign exchange markets. I’m originally from New York and moved to London at the end of 2009 to acquire an options business. But long story short, Ian, I’m still based in London, and I joined Hidden Road when the business was just being set up.

As for the origins of me joining Hidden Road, it was late 2019 when I received a call from Mark Asch and Joe Buthorn, who wanted to give me some insight into the business they were looking to build.

Important to understand that Hidden Road was always a multi -asset, multi -product PB and clearing firm. Digital assets was just one part of it. The pitch was simple and clear in that the incumbent PB and clearing firms were stepping back from various markets and clients.

And so this in and of itself presented a unique opportunity to build out a horizontal, modern technology, quant -driven, PB and clearing platform.

And it’s funny, as I initially thought Mark and Joe were kind of pitching me on using them as a prime broker for the trading business I was involved with then, which I certainly would have, but it quickly became evident that they wanted me to join the firm and help run the business development side, which I did at the start of 2022.

So I’m currently in charge of sales, marketing and distribution of our products and solutions globally.

Specifically, to your question on the digital PB business, it was always on the roadmap. As you alluded to, we started with FX prime brokers. There was an opportunity as one of the largest banks stepped out of the space. But very, very early on, we had this undeniable amount of interest from the largest trading firms to enter the digital asset space.

Many were existing clients on the FX side of Hidden Road. So in early ‘22, we decided to extend our clearing infrastructure to launch the first truly unbundled digital prime broker.

So Hidden Road and the larger institutional clients were analyzing the market structure and it was clear a PB was needed to help solve part of that nascent infrastructure. The market was filled with counterparty credit risk, it was all bilateral, settlement risk, or what’s referred to in FX as Herstatt risk.

The market was all pre -funded, which made it capital inefficient, and there was a lack of any real standardization.

So overall, the structure looked like the FX structure, which is highly fragmented. And so to wrap up, when fragmentation is a theme in a market, PBs tend to do well, as do the trading firms – as they thrive off fragmentation and global pricing. And so, we launched the business, the digital side, a few years ago in response to the client’s request, and we now clear a material percentage of the global crypto market.



That’s a lot on that answer. That’s fantastic.

We’ll dive into some of it. Just to set the stage and to double click a little bit on the term “prime brokerage” – since it’s probably well-known and well understood in the traditional assets and traditional markets that you come from and so on.

In crypto, it’s been a little bit more hazy. I think some people have kind of thrown the word around a little bit loosely. So very specifically on prime brokerage, how do you understand it?

You mentioned some things there, clearing, settlement, credit and so on, but just define it for us very, very specifically.



Yeah, so let me take that in two parts. I think, you know, I’d like to highlight why it’s hazy in this space, which is not in traditional markets.

The first reason is because the initial infrastructure was built in crypto was built for retail investors.

So, the structure was vertical in nature, meaning clients would open an account at the crypto exchanges who ran the marketplace, the custody of assets of the users. And in certain instances ran internal market makers that obviously didn’t work out too well.

But the initial structure kind of confused and blurred the lines of what exchanges were doing as they were filling multiple roles in the ecosystem.

The second reason for confusion is the role of a prime broker, you know, comes from how certain firms are marketing themselves.

Okay, there’s a big difference between a broker and a prime broker. In fact brokers should actually be using prime brokers, but mixed marketing messages create this confusion.

The amount of times, Ian, I hear people saying they’re a prime broker when they’re a custodian or they’re a normal trading broker is mind boggling.

And finally, kind of relates to the first point that many of the crypto native folks didn’t come from TradFi backgrounds and they’re just not familiar with that market structure.

And in many cases, the TradFi world was forced to build over the last 30, 40 years. And so in short, that’s more of a horizontal ecosystem – unlike crypto, which was vertical.

And so the crypto native community, again, extremely talented. And as the market is maturing, and unfortunately, they’ve been through several blowups, they’re learning a bit the hard way that you need to separate these duties and responsibilities.

And by doing so, it leads to better infrastructure.

The second part of your question, and I’ll be more brief here, what is the role of a prime broker? It’s actually quite simple. Prime brokers are commonly referred to as third party credit providers – and are there to inject capital into the market to allow clients to trade across a whole ecosystem in a safe, capital and cost efficient way.

Specifically for crypto, we as a prime broker allow the client to trade wherever they want and on a post-trade basis, give up the positions to Hidden Road where they net and settle.

And so very quickly, wherever they want is bucket one is the crypto exchanges and spot perpetual swaps, futures and options.

Bucket two is the OTC market, where they face market makers bilaterally from trading, but they give up the position to the prime broker where it nets and settles.

Bucket three for us is, we’re the only PB in the world that’ll cross margin and margin finance native crypto against regulated futures and options, for example, CME.

And finally, the fourth bucket is clients can trade on non -custodial ECNs where we provide credit including the likes of RULEMATCH that are coming online and winning material market share.

So as a PB, we provide clients credit, margin financing to trade across all of these. We take away the counterparty risk they face and settle with us. It’s a well-known, well-capitalized entity.

What we’re not doing is calling ourselves a PB and then giving clients a platform that routes all their trades. And in some instances, these so-called PBs are actually running trading desks.

This is a very different business and one that presents very different risks and concerns that clients need to carefully evaluate.

Many of these firms we are calling them PBs are unregulated and thinly capitalized. So that’s a little bit of perhaps why there’s the easiness, what we do and certainly what we do not do.



I can certainly understand the frustration when you are trying to do a really big business and do it right and do it the way it’s known and other people are marketing themselves differently.

Just to also clarify on that, so all of those things that you’re offering under the umbrella of prime brokerage, your clients then are hedge funds, they are prop trading companies, they are…?



I’ll be very brief on it. Clients, they’re the largest trading names in the space. And they’re the largest trading names that are coming from TradFi into this exciting market.

Depending on their own regulatory setup and jurisdiction, we offer different product sets and products and services to cater to their needs. Define the clients, the largest broker dealers, both institutional and retail brokers, proprietary trading firms, hedge funds, asset managers and there’s a few banks on the platform already.

And again, in partnership with folks at RULEMATCH, we’ll likely interact with much more on the banking side.



And so then drilling down just a little bit on the gaps that you’re covering, and you mentioned quite a few there, seeing how things have developed from the retail space where there hasn’t been this yet, even though people have said that they are doing this.

Lending, credit, borrowing is one gap there to enable big business. How do you think this is going to change the market dynamic or how has it changed already the market dynamics in the time that you’ve been online with the digital assets offering?



I mean, just to double click on the gaps, right?

For institutional clients, they either cannot trade on all of the current infrastructure, and if they can, they can only do that in small doses because of the risks involved.

And so the gap that we’re filling is very large. In short, giving them a highly regulated PB platform to access the entire landscape in really a safe and capital and cost efficient way is the goal.

What does it look like kind of, you know, the before and after?

I think it’s important to remember the initial lenders in the space all basically blew up.

In fact, when we look back in years, I think the issues from crypto early on, I think we’re going to point to the irresponsible lending and those providers that were in the space.

The idea that they could take capital from retail, promise yield, then have it sit on their balance sheet, burning a hole in their pocket was not a good one. And so as a result, they wildly lent this out to trading firms with little to no track record, unregulated, and didn’t even have audited financials.

To me, in the traditional world, that’s crazy.

So the way Hidden Road as a true PB offers those services is through margin financing. This is very different than lending clients outright collateral.

We can lend in size into accounts that we control and monitor from a risk perspective, and ultimately that allows the institutions to scale their business.

And this is what will change the dynamics in the market is that part of that infrastructure.



Very interesting. Yeah. And so now people are able to do much more and with much more security than they would have if they were potentially going to somebody that said they were a prime broker, but actually doing it in a pretty shady way.

Just a side note on this, as you’ve brought this out, what’s kind of the demand of different assets, Bitcoin, Ether, stable coins, spot versus.. How has that developed?



That’s a really good question. We see demand, you know, really in the majors, right? That’s where most of liquidity is.

So certainly, in the likes of Bitcoin and ETH. We certainly see demand for the larger stablecoins and watch that space.

There’s some new coins coming online. But, you know, we certainly see demand for dollars.

You know, we support access to some of the cash-settled venues, like for the CME, as example, which is great for venues like the crypto miners who use it for hedging purposes, right? Today, they’ve been forced to trade on other venues when the mercantile exchange was set up for hedging forward risk.

And so because we have the ability to lend coins, stablecoins and dollars, it gives those clients the ability to trade and borrow to trade across a wider range. But look, the need for dollars to be able to trade and post in-kind assets is a real thing.

And we’re facilitating that and growing that space out.



And of course, I’m sure watching the space as it develops, new things come online, but also, different developments come in the regulatory space.

That’s also something everybody has to watch going forward. Let’s talk a little bit about the counterparty risk thing that you mentioned. And, you know, I can imagine a PB is really kind of a booster to somebody like a hedge fund, the largest trading firms, as you mentioned in this space, but also serves as a buffer, right?

So a buffer against those perhaps sketchy counterparties, helping to protect against market risk, credit risk, counterparty risk.

How has the thinking been around counterparty risk from these companies that obviously are in the space and want to do more in the space?



I think counterparty credit risk, no matter what asset class you’re trading in, should be at the forefront of every investor. And that’s no different in the digital asset landscape.

I think sometimes folks forget about those things, go back to 2008, even the banks had runs, right? And so crypto is in this very early stage and we’ve all been through some of these bumps in the road. And so that protection is paramount.

Again, as mentioned, some of the existing market structure has conflicts of interest. And as a result, there is a run on these banks.

Take FTX, right? It was a perfect example. They ran the marketplace, they held assets for their clients, they also ran a trading desk, and they had a lending desk, right? They were re-hypothecating client assets.

And when there was a loss and everybody wanted to pull their money, there was an immediate run, right?

This is a classic mistake. It’s not unique to crypto, it happens in traditional markets.

So first and foremost, as a PB, Hidden Road, to my knowledge, was the only firm who took counterparty risk away from a default in FTX for clients who subscribe to that service.

These firms claiming to be PBs, again, didn’t take that risk.

So it begs the question, what are they actually providing? But look, as a PB, we do a few things.

First, our actuaries are experts in underwriting counterparty credit risk.

Second, we manage liquidity. And by that, I mean liquidity on our balance sheet. And therefore not in the business of rehypothecating client collateral, but instead we build our own balance sheet, which is backed by some of the largest names in the world.

Third, we price term liquidity. And so, this is where we lend or we provide that margin finance I was talking about earlier. We know where it is. We know under what terms we’ve lent it out and when we can recall that.

And finally, and probably most important, is you set appropriate limits for all counterparties that you interact with, including exchanges that you interact with. Right?

And so we have a very different set of limits for folks like FTX, right? Than we do for the CME.

But regardless, you set limits and you stay compliant within those limits. These are principle-based approach. This is how and why clients can get comfortable with Hidden Road is our team is built, managed, and frankly commercialized many of the PB clearing platforms in the banks over the last few decades.

Last thing I would say on this topic is we’re starting to see these viable off-exchange, tri-party solutions come online. This will help reduce counterparty risks from facing the exchanges directly.

By putting this in place, real institutional capital can enter the market. That usually comes through liquidity providers or PBs like Hidden Road. And again, we’ll do that in size.

There’s confusion here as some trading firms think adopting these triparty solutions themselves is the answer.

But if you look at traditional markets, that’s not the answer. It’s really the PBs that would do that directly and actually make it more if they do it directly, it’ll be more capital intensive for them.

And so finally, it helps solve the credit risk in spot, but not in the derivatives side.

So there’s confusion on these new products coming online, but nonetheless, they’re attractive like everything in crypto.

It’s very early on, the market’s maturing, various market participants are learning, sometimes the hard way, but the good news is, as an industry, we’re learning every day and learning facts, sometimes painfully.



And learning fast, that’s the key, right?

Just on that topic of the tripartite setups, do I understand correctly? Then one part of that is also the custodian, wherever that is in the setup, the trading venue, the custodian, and you, the prime broker, or how..?



No, that’s right. I mean, when I was referring to it earlier as kind of a horizontal build, right?

You have in an ecosystem, multiple people do the separation of duties, right? I’ve been quoted before: I’m separating church and state.

And so, you end up with folks that run matching engines and provide matching services like RULEMATCH. You end up with custodians, their job is to hold assets for those counterparties. Market makers transfer risk around the system and prime brokers inject credit to trade across all of these different venues in a capital and a cost efficient way.

And so custody is a very important part. The matching engine of obviously the marketplace is crucial. Market makers are crucial and prime brokers are crucial.

And the key is that we all work together and ideally start to build standardization in this market. That’ll be a theme you’ll hear me talk about going forward: standardizing that workflow, standardizing the legal agreements.

We’re a long ways from that. And unfortunately, if you point to history, it takes a long time to do that.

Interest rate swap markets took decades to write ISDA, but there was this undeniable demand, Ian, to achieve it. The demand for the product was there. And I believe we’re in a similar state today in digital assets. So it’s important that folks in the industry work together to build this out properly to scale.



That’s great to hear.

So yeah, that shift towards standardization and things that are more comfortable also for institutions, since of course that’s the focus of what we’re talking about here.

And one thing that you address, of course, is the clearing and settlement side of things. So as you mentioned, post -trade settlement and those things that were not at all possible or even known in the crypto space for quite a while from its retail background.

Do you think people are starting to realize now that we need this post -trade settlement clearing and proper setups to do that in order for the industry and the dynamics to grow?



Great question. So two main problems today, right? We talked about it before.

First is that the market lacks any standardization and coupled with that, the market is being is built all bilateral.

And that’s part of why there is a lack of standardization. Meaning counterparties face each other. They need to set limits. They need to agree on settlement sizes, settlement windows. And there’s a lack of any formal documentation which doesn’t allow netting. So, it becomes inefficient from a capital perspective.

Simply said, a PB takes that away as bilateral settlement risk and provides clients with netting, which greatly reduces that settlement costs and their operational lift to scale.

And as a result, a client leveraging a PB can trade with more liquidity providers to help drive down their cost of trading while not adding additional risk and not adding complexities of doing this under the current model that exists today.

And so it’s been a bit of a mishmash.

Again, Hidden Road already handles and helps normalize and standardize settlement for institutional counterparties. With regards to this specific question, I think it’s important to clarify the difference between derivatives and spot.

I think we’re referring to spot. But on derivatives, we help to create this fungibility and netting of risk.

The market structure, in my view, looks more like FX and the use of PBs will help solve these problems. There’s no CCP as such in FX. It’s over-the-counter market.

FX PBs use the likes of CLS to help negate that, Herstatt settlement risk. I think we’ll see something similar in crypto. But remember in FX, you know, only CLS currencies settle in CLS.

Where non -CLS currencies, you know, most of which are frontier currencies, kind of like crypto, or settle bilaterally between PBs under ISDA and legal framework.

And I think this is ultimately the direction we go in crypto. I can tell you already, that’s how HRP’s workflow is similar to. But again, early on in crypto and lots of areas to improve collectively.



And do you think that mishmash, as you call it, or as we call it here, is a barrier or has been a barrier to institutions moving into the space?

When they try to think about putting crypto in an asset bucket, along with all of the other things that they do in other markets, and then you have this kind of mismatch in process, timing, so on and so forth?



I think it is. I think it’s an endurance. So, you know, folks that have been in the space have been able to, you know, build out workflows that work for them.

But simply said, if you had two liquidity providers, okay, that you traded with, and you bought Bitcoin from one, and you sold Bitcoin to the other, then you have this gross settlement to the street, okay?

And so you’re sending your dollars here, you’re waiting for Bitcoin, you’re hoping they send your Bitcoin until you send them the dollars and you have the net.

Through a PB, that all works. But imagine without a PB at scale.

You have 1400 spot tokens on some of the venues out there. Okay.

If you had five market makers or liquidity providers doing that, the permutation is out of control to be able to trade on best price, which you have a fiduciary responsibility.

You know, if you’re a hedge fund to your investors or your LPs, if you’re a broker to your ultimately your end clients, that’s not really feasible at scale.

And so, what folks have done that have taken the leap of faith into crypto is they’ve limited who they can trade with based on certain criteria, which is fine and probably the right approach because they’re managing counterparty risk and trying to mitigate settlement risk, but that’s not efficient at scale.



And when you think about moving forward, I mean, obviously you as a prime broker are moving the industry forward that way.

We at RULEMATCH have many of the same thoughts.

Do you think over time we move the entire industry towards that kind of more traditional standardized setup with clear post -trade settlements, clearing more capital efficient setups?

A little bit like, you know, it’s interesting to see the New York Stock Exchange starting to think about 24 -7 trading, maybe because they see assets like crypto are being traded this way.

How long does it take to really move things forward like that?



It’s a good question. I think the short answer on this one is for institutional counterparties: yes.

The current infrastructure again was built for retail and so institutions and our regulators will likely require this horizontal infrastructure we’ve been describing which will offer material improvements to the current settlement process and greatly improve the capital efficiencies in the space allowing third parties with capital to really enter the market, which again usually happens, you know, through prime brokers.

And so I think collectively, we all will move this to the infrastructure that institutions, you know, creatures of habit are, are known for, and understand and like – frankly, and as do the regulators that over many decades have pushed it there.

As for the speed of how that happens, again, if I look at interest rate swap markets very similar early days, completely non -standard.

It took years for ISDA to be put together and formalized, even with the motivation to do it.

I’m talking about from the 1980s. Interest rate swaps didn’t move to cleared until 2011 or something like that. So that’s a long gap. The good news though is crypto moves a lot faster.

We’ve made all the same mistakes just in half the time.

And so…

Glass half full here, Ian, I think we will move there and I think we will move there pretty quick, but the reality is it takes some time.



So let’s, let’s go back to the FX topic since you touched on it earlier and you were, you were alluding to some of the similarities and you mentioned fragmented liquidity and how some people view that – there are advantages and disadvantages.

Can you just break that down for us again, in a little more detail and – and how maybe your clients view that also from an advantage or disadvantage standpoint when they use your services?



Sure, I think that digital assets is taking kind of the best of breed from foreign exchange market structure, a bit of equities market structure, kind of stock loan side of it, even almost a bit of listed derivatives.

So it’s – I use that word again – a mishmash of many of these things, but specifically on the fragmentation side, credit intermediation from PBs is crucial, right?

The OTC markets like FX and now crypto are by definition fragmented.

The simplest way to think about this is in FX, there’s not one place to buy euros and sell dollars. There are multiple.

Just like in crypto, there is not one place and there won’t be one place to buy Bitcoin and sell dollars. There are multiple.

And that’s going to continue. Institutional clients have a fiduciary responsibility to trade on the best price and demonstrate best execution practices where hedge funds managing third party capital, an asset manager, a broker dealer or a bank all fall under this.

And so in order to achieve that, you need a few things.

First, you need to access the marketplaces that have multiple market makers streaming behind them – RULEMATCH. Great example of this as clients can scan the market in real time and deal on the best price.

The second thing you need – counterparties. And this is that what HRP handles –  to have credit to trade with all of them.

Okay, if you build bilateral credit, that’s fine. It’s an option, but it will be capital inefficient and you’ll still end up with that settlement risk and settlement complexities that I spoke about earlier.

The time it would take to build bilateral credit again is decades. And remember, there’s no standardization or is the type of agreements yet in crypto.

As a data point, again, I’ve highlighted it before interest rate swap markets took decades to do this.

So to me, it’s clear that crypto is again very early on. We’re moving at a good pace.

But that doesn’t happen overnight. And therefore, fragmentation and lack of standardization will continue for some time.

But I do think that markets move towards quality.

And so in order to be part of that destination where clients trade, do the basics.

Get regulated, get audited, right?

You know, simplify your business model, focus on what your role is in this ecosystem. And I believe that if we all do that, we end up with that horizontal build that I described before and you solve for fragmentation.

And it’s okay that it’s fragmented and there’s multiple prices to buy Bitcoin or ETH or any of the other assets. That’s okay and it leads to competition.



And competition usually is good. Usually.

Just on the market model side of things, when we talk about FX and also crypto, there is RFQ. Now something I understand in FX, RFS – “request for streaming.”

A CLOB has generally been used in most so-called crypto exchanges up until now.

There are advantages to that.

How do you see those different models and the advantages, disadvantages of that going forward for crypto?



It’s interesting. It’s almost like every market that I’ve seen over my career is, there’s a high touch and then the markets start to move very much into electronic trading.

One market that’s going through that right now is the fixed income space, watch that space.

But your question in digital asset, it really depends on the market participants and what they’re looking to achieve, right?

Like most markets, again, at early stage, they’re heavily broke or voice broke or have this high touch. And as the market infrastructure matures, counterparties start to move electronically, as again, it’s more efficient and better price discovery.

So digital asset markets – no different.

And so we see CLOBs growing as well as RFQs to service those different type clients.

I think you’re soon going to start to see much more development around the algo executions like we see in TradFi, especially for clients that need to execute large sizes.

Ultimately, TCA or trade-cost analysis is going to get forced into the market.

This will force clients to measure their execution quality and move towards different liquidity sources and platforms and market models that best suit their needs.

And so again, the likes of RULEMATCH, other ECNs, and certainly prime brokers like Hidden Road are key in achieving those requirements and those demands from clients and investors.



Let’s talk quickly… We’ve been mostly, or at least from my standpoint, talking spot crypto since that’s our focus.

But you have a much more diversified view. We talked a little bit about this back in Davos in January, just after the Bitcoin ETFs came out, the spot Bitcoin ETFs came out in the US. There, there had been a dominance of future ETFs in the States.

How do you see the dynamic of futures and spot in crypto developing and playing out over the midterm?



There’s a need for both. That’s the reality.

The spot and derivatives certainly have their place in the market. Like in most markets, derivatives are larger than the underlying market.

There’s a few reasons for that. They’re generally cheaper and easier to trade and you don’t need to physically purchase the assets and deal with the cost of storage or security of holding them.

However, with futures, the other side of it is clients need to deal with the extra cost of rolling them and the dealing with curve dynamics such as backwardation and contango.

I do see more products coming online such as options and ADRs, which will have overall growth to the industry and kind of general acceptability of digital assets as an asset class.

But ultimately both are important. Specifically with the new Bitcoin spot ETF in the US – you’re right, Ian. I enjoyed the session with folks in Davos at the World Economic Forum.

In fact, the US Bitcoin ETF has profound impacts on the underlying market and we’re starting to see some of those.

Given the market, the ETF had adopted based on the spot market, it’s certainly growing that.

The launch has already led to greater liquidity, greater product development. Again, options and ADRs are starting to see that and overall greater acceptability. As a result to the follow on of this market, the Bitcoin cash market is positive as new entrants and bigger flows demand greater accountability and accessibility from the industry.

We start to see the market trade a lot more during the US Bitcoin ETF market hours. I expect that to continue for some time.



I saw somewhere and I can’t pull it up now and wasn’t able to pull it up before our session today, somewhere looking at the price movements in the closing time of the US market when I guess there would be this rebalancing in the ETFs.

Those things that people are watching also, those dynamics that have now kind of become more important since these ETFs have come online.



Yes, I mean, I think you’re going to. We have to remember and appreciate that this is one of the most successful launches of an ETF of all time.

Again, I use that word, undeniable demand for institutions to gain exposure to this asset. And, you know, we can do another whole session as to why, you know, perhaps that has to do with, you know, the geopolitical situation we’re in – with sustained inflation and holding on to these types of assets that may be more attractive than holding gold.

But ultimately, this large US market opening up in an equity format is going to have a very profound impact on the market.

And I think it’s early days still, but you’re starting to see some of that trading happen during those hours towards the close. And again, I expect that to continue for some time.



When it comes to this topic of futures versus spot and so on, you mentioned the CME and you were recently admitted, Hidden Road to the CME.

I think one of the few in the last few years, if I understood that correctly, so that’s quite a rah -rah moment.

How important was this for you guys and for how you see the market developing?



It’s a big deal. There’s a dwindling number of FCMs and GCMs on the CME, which you alluded to. And we’re covering that not just for digital assets, but the whole complex of products. So, but specifically for the digital PB business, it’s usually impactful as we’re really the only one globally who will offer cross -margining and margin financing between native crypto and these regulated markets.

This attracts a very different client type that has traditionally been able to trade in digital currencies.

So really, and I’d say, you know, watch this space as there’s only one real way to trade, you know, true difference between hidden road and those other pseudo PBs. This is a big deal.

So I certainly think the CME is a key market to have access, you know, as do our clients. That said, there’s the derivatives market and there’s the spot markets.

And so, you know, as these ECNs come online, I believe you’ll start to see a lot of strategies that are common in traditional markets to trade the underlying against the future, à la the “basis trade.”

And so that’s a unique opportunity and we’ll bring a whole slew of additional investors and strategies into the market, which we’re all excited about. And so hopefully some of that liquidity from CME is put into the spot market and vice versa.

And that bridge and conduit in the middle is an area that we’re pretty focused on.



How, if I can ask, just how long did it take you to actually get that and to make that happen?

I’m sure it was quite a process.



It was a very extensive process. I mean, there hasn’t been a new FCM GCM in over a decade, I’m led to believe.

And therefore, you know, both sides, you know, needed to get rid of some of that rust to figure out how this is going to work – with modern technology coming in as kind of a new kid on the block.

But, you know, it was it was as efficient as possible. It’s a big deal to enter that space.

And so, you know, you’ve got to meet all of the criteria. If you gave me a number, it’s two and a half, almost three years of work. So, kudos to the team and all the folks that helped get there.



Maybe just on the back of that, you know, obviously that’s a highly regulated space and you’ve mentioned previously in the conversation, just the focus on regulation, “regulatory first,” – not an approach that everybody in the crypto space has taken.

How important is that? And how do you think you shift the mindset towards that over time? Will you be a leader in trying to…change the mind of the market towards this regulatory first approach? How do you see that?



Again, it’s a collective group of folks that need to adjust market structure.

Certainly regulations is important; regulation is at the forefront of our business across all the asset classes and products.

In some of the traditional markets, there’s not an option, right? This is par for the course.

And so we see digital assets is really no different. And so various legal entities that are set up and regulated.

In the UK, we run a MITFID license under the FCA as well as have a digital asset registration, what they call AMLD5.

Similar in our European entity, regulated in the Netherlands under the AFM and the DMB, which is the central bank that covers digital assets. You know, MiCA coming online is a big deal as that’s going to provide the clarity that institutions in Europe need to access the market and scale.

This is a really exciting development as well as an opportunity for Europe to kind of take pole position in digital assets.

And so I think, again, regulation is something that we’re all embracing and to get that clarity that we need will allow this market to really morph into the asset class we all hope and know it can be.



Are you looking very deeply and specifically at MiCA? How are you preparing for that? I’m sure you’ve got boots on the ground and looking into the details or?



Yeah, we certainly do. A third or a little bit more than a third of our team is legal and compliance.

And so we spend an enormous amount of time, effort, looking at those rules and also speaking with policymakers that come to us as kind of a leader in the space because they’re trying to figure it out with everybody.

This is a new asset class. These don’t come around that often. So the short answer to your question, Ian, is…

We have an excellent team here that is spending countless hours on figuring this out and helping to navigate. And one of the alphas in our trading business is certainly our structure and regulatory status.



And I think we both agree that will be an advantage going forward. No doubt about that.

We’re moving towards the end of our conversation, but I wanted to also for our viewers and listeners ask you from your perspective – since you are very close down in things and have been seeing lots of developments – is there something in your mind that is happening or will happen in the near to midterm that other people are missing or not looking out for  – something that people should just kind of watch out for?



So, a bit of my crystal ball perhaps? Geez, I’m sure there’s a bunch of things I could comment on.

I’m probably under NDA in a bunch. So, I’ll refrain from doing that.

But there’s a number of areas. I think one that kind of sticks in my mind that’s very relevant to our business.

And so I’ll use that as an example is – I think – the custody space.

There’s a lot of movements there, right? Holding assets on behalf of a whole asset class, holding the value of those in a secure manner is obviously extremely important. And so, look at the launch of the Bitcoin ETF, right?

A lot of that is centralized in single places. I think…

Most folks in traditional markets that have, custody providers or prime brokers use a variety of them, right, for lots of reasons.

And so I think in this space, the custody space is an area, you know, to kind of watch.

I think, you know, as the banks come into this space, you might even see some M&A in that area.

So that’s a little bit of my crystal ball, an exciting area, an absolute core part of institutional infrastructure going forward – especially what you just saw on the net inflows on the ETF side.



Absolutely, I think we fully agree and that is a space again that, you know, from a regulatory perspective and also for the future sustainability of the space has to be separated from the trading side.

I think we agree on that segregation of things. So custody will be very interesting to see, especially if new, as you mentioned, the tri-party or multiple-party setups develop and prime brokers come online like Hidden Road move the space forward, help to accelerate things.

That’s going to be very, very interesting.

Michael Higgins, thank you very much for the session. It’s been very insightful.

Probably not the last time we have a chat, hopefully. Maybe in a few months, we’ll come back and talk about some more things as they develop. But thank you very much for being on RULEMATCH Spot On.



Ian, I really appreciate the time. Thank you very much.