The Next Generation of Market Making and Liquidity Provision

Transcript

okay welcome back hope you're sufficiently caffeinated we have two three more sessions for today and one of them is uh on a topic that we've never really discussed on the CVC stage about liquidity and Market making and our wonderful demelzahies will be moderating and introducing our speakers thank you very much Nikki and thank you all for coming to the conference today and listening to this panel on Market making so I want to go ahead and get started and let each of the panelists introduce themselves maybe we'll start with Jonathan so hi I'm Jonathan Mathai I'm a chief product officer and a co-founder at G20 we're a crypto and cross asset trading firm and

infrastructure as well before G20 I was at UBS for 10 years initially as a Quantum later as a Emerging Market options Trader a T20 I help build out our product area we're active in Market making and OTC treasury management and also some infrastructure Services as well okay I'll go welcome everybody my name is I work at IMC I live in Amsterdam I joined IMC back in 94 and that's a long time ago I left in 2010 then I did all kinds of other things and then got interested in crypto started a little crypto trading firm in 2017 and that was that became part of IMC in 2021 and that

was the start of IMC crypto and now IMC is uh yeah what's a big name in in traditional Finance but now it's also going to be active in in the crypto space excellent hello everyone I'm Kevin De petul I'm the co-founder and CEO of kirok so Kyogre Market maker liquid provider in digital assets I founded the company back in 2017. and today we provide we provide equity on more than 85 exchanges centralized decentralized uh making more than 500 markets 24 7. same thing doing Market making on venues of venues OTC working a large variety of instruments and yeah very happy to discuss this topic with

everybody here today excellent well thank you very much so we have Jonathan from G20 mark from IMC and Kevin from Key Rock so these are I think some of the the most well-known market makers in the space but I think for me as like a as an average Trader for cryptocurrencies I don't even realize you guys exist like my trades just get executed when I click buy and I think you know maybe it would help me understand like if I'm five years old explain it to me in a really simple way what what do market makers do in the cryptocurrency space so I can take a go at that um so imagine actually we're all five years old and in the same class

and we love this one particular toy that we uh love to buy and sell to each other so in that situation you can imagine that a load of chaos there's going to be five-year-old fomo with everyone trying to buy the toy and then sometimes no one wants to have a toy at all and tries to sell it and so on so in that situation you know it's pretty chaotic and so on so it you know you step into the situation you call everyone and you say instead of training with each other why don't you come to me and I'll provide you a price always right by and a price where I will sell as well so in that situation you're acting like a market maker you're providing liquidity that's the ability to buy and sell in a Marketplace to a Marketplace then you're available all

the time okay so in that example you have to have a stock of the toys and you're always and you have to have a stock of some other asset so you're always prepared to sell the toy and then get that or you're always prepared to to buy the toy with that asset exactly okay perfect okay and now in the traditional space well that's kind of how it works in the traditional space um what would be the parallel in the cryptocurrency market like how does that work maybe Mark if you want to explain okay I can have a go um it's basically the same right so we make markets a market is defined as a combination of a buy or NSL order so that's what we do in traditional space and also in crypto

space and doing that we provide liquidity and it's the other keywords that Johnson also mentioned because there's no exchange without liquidity electricity means that you if there's no liquidity you would never buy anything because you're not sure if you can if there's ever going to be a buyer for you if you want to get rid of it so we provided liquidity by always putting in the bid orders and the sell orders at the same time in traditional Finance these markets have existed for way longer than the crypto markets of course so there's a lot of competition so there it's really um yeah there's there's not that many market makers anymore because they compete on speed and on sides of Trades and there's really for IMC for instance

um there's so many markets asset classes we are active on it's just really hard to compete with that and if you are but in crypto it's different because there's not those that many big products well there's Bitcoin in these but there's really thousands of tokens that also need market makers to provide liquidity and there is less competition but that's also harder because there's also less trading in it so that's a different game in that respect I hope that's clear anyone can ask questions right if they sure also happy to take questions um so basically in the traditional market like let's say you're on the New York Stock Exchange you want to buy a stock there's a market maker behind the

scenes that's making sure that those orders are getting executed likewise in cryptocurrency market like binance that's the same situation so you would have a market maker there who's trying to make sure that if I've got US dollars I can get the Bitcoin and vice versa I mean I think that the the logic applies to digital assets uh the sub part of it that is crypto a traditional Market actually replies to any type of Market why do you go on the marketplace is that you want to be able to change something right you want to change an asset for some Fiat you want to exchange a toy for candy whatever you go to a Marketplace to be able to exchange right and it's great for you to rely on the fact that somebody else will come on the same Market as you at the

same time to do the exact opposite transaction at the same price that sometimes can happen right but it is better to make sure that you always have kind of a backstop or you know that some players like ourselves our professional market makers and will basically always be there so if you go on bitstamp Kraken binance any other exchange and you actually buy it may very well be that it's another retail Trader that is doing the opposite of that trade at that moment right but it could also be that there is a professional Market maker like us because of course it's in the interest of the exchange and of the marketplace to know that there are some players like us always providing liquidity on the market basically and that logic of the

added value of the liquidity applies on any types of Market being financial markets or other types of markets basically okay so when I go to do a trade on binance I don't know if the other side is a market maker or a retail you don't know if it's a professional Market maker or not but when you open if you open on on your laptop you'll open bitstamp today and you place limit order you're making one side of the market right so anybody any retail can be a market maker but you don't know whether that's that order that you're going to be taking you don't know if it's there by just a a retail player that happens to want to trade at that particular price at that particular moment or whether it's an order coming from a professional firm like like yourself that is providing those orders 24 7 basically

yeah yeah it doesn't matter maybe you can explain this to me like I noticed that like there's maker and take or fees right and if I just do a market order I pay a little bit more than if I do like a limit order is that correct yes because I'm helping provide liquidity for the order book is that why I'm getting a slightly lower fee if I do a limit order that's going to depend from exchange to a change right okay each exchange can have a different policy there is in general at least in in crypto uh and digital assets on average you're going to have lower Mega fees and take a fees Okay the reason is that as a maker you are providing liquidity to the market as a taker you are taking liquidity away right as a maker by definition you are always on the wrong

side of the market so to speak because if I make the sell side I'm going to be selling what everybody you know wants to buy and I'm you're always on the wrong side as a maker and therefore there's kind of a composition for that is that okay you are you know providing liquid to the market therefore taking potentially a higher risk in your position and that's why you have uh potentially a lower fee but that depends from exchange to exchange it's kind of a business decision from The Exchange as to how they want to attract market makers or Market takers which one they want to attract most volume from and how they want to go about it that's their business that makes a lot of sense so I think I kind of understand the basic uh purpose and use case of Market making and how it works

um so in terms of like size would you say that you know Bitcoin has more Market making on it or like a smaller coin uh you know maybe a like a I don't know like take a rocket pool or a lead or you know a render token like it's one of them you know Sub sub top 50 market cap coins which of those would have you know maybe more market makers involved in that market yeah I think um the lower down the coin market cap Spectrum you go the more likely you are to find a market maker involved because there's not as much natural liquidity and it's harder to find your you know your natural offset there's probably someone always wanting to buy or sell Bitcoin uh even from a

non-professional market making stance but it's maybe unlikely to find someone who's always willing to do the other side on a lower liquidity token okay that makes a lot of sense so okay maybe going down into a little bit of a deeper dive on Market making um let's learn a little bit about each of the firms that you work for so maybe Mark you can tell us are you involved in spot Market making or derivatives Market making both both yeah and imc's traditional Market making was in equities or originally it was options trading but then you also trade the sport of course the stock but nowadays it's in all all kinds of asset classes so the exception of FX but it's it's anything else bonds

stocks Futures whatever okay and uh and in crypto it's it's Futures sports but also centralized decentralized okay and Kevin so same thing we're we're active on the digital assets only so uh kirak we started company in 2017 with a pure focus on digital assets from the start so that's the only Market we were on but within that market we traded also we trade spot we trade burps with the retreat options we we trade all types of instruments on centralized exchange decentralized exchange okay and what about G20 on the G20 side we're active we actually came from a traditional Finance FX background but we branched out into crypto as well about four or five years ago and we're active on the

spot and derivative side our focus is is options in particular on the derivative side and what are some of the platforms where you're active like is it OT desks is it exchanges like where who are you doing Market making with uh yeah so it's across the board so um on lots of different exchanges I think it's the same for for all of us on that side um and we I guess maybe the flavor for each of the different firms would be who we partner with in particular I think will each have special relationships with you know one one or two exchanges and so on as an example on our side we're partnering with bit.com one of the upcoming crypto options exchanges to do altcoin options Market making on that

side bit.com oh part of Matrix Port yeah okay and uh Mark what what yeah well I think I think anybody would be on binance who trade sport anybody who trades options will be on Dairy with never maybe on Paradise and uh and then after that maybe we focus on the on the biggest exchanges so that will be okay x uh by bit just the big names and also on a few specific ones but that is on because clients require us to be a market maker for them a liquidity provider for them in the certain exchange and then we onboard and connect in there and and then so it grows also

that in the direction okay I'm not going to have a very different answer like I think the the list of the markets we're not trading on would be a lot a lot faster to make than the ones we're actually trading on because yeah we've we've integrated around 90 exchanges over the last five years centralized decentralized we have our own OTC desk we stream prices in other uh other venues as well so it's really a I think you know same same reason I guess why we're also active on you know spot perhaps option it makes sense for a market maker to have very different different type of flows coming in to manage to manage your risk as well as you can and if you narrow your focus on one type of Market only you kind of you know lose lose that ability so we we trade on a very very wide spectrum okay

so is there a market where nobody Market makes like is there is there an exchange where nobody's active uh one that closed down I guess their primary primary Market maker partner okay guess on the decentralized side I guess you can can argue that the amms are not really a a market maker as such but uh but you know algorithm handling that and would somebody like gold get into Market making on these exchanges or is that just Never Gonna are they never gonna take interest in it I think they would get involved on a on a regulated platform like the CME for example and I know that um you know typically the big FX Banks tend to work

fairly heavily on the CME for the FX business um and it's fairly natural to assume that they will make that leap at some point on the CME on the Futures and option side I mean I think on that it also depends how how you define digital assets right and what is behind it if you look at digital asset at large today what crypto is and what you know most of people trade on is kind of a very small part of what digital assets could be in kirog's view all assets would eventually be digital so the same way that you know Goldman Sachs and other very large actors make markets on on Equity they're going to continue to make Market on Equity but that Equity will actually be a token it will actually be a digital asset and therefore they will get they

will get involved unless other players got too big in the meantime that makes a lot of sense so basically if I understand you correctly you're saying that one day all equities will be digital assets yes and therefore Goldman because they Market make with equities they'll be Market making with digital assets yes okay I really I like that point a lot so would you say right now that maybe there's an opportunity for market makers in the cryptocurrency space because maybe some of the larger players like you said will only go on regulated platforms so is there kind of an opportunity right now to get involved where where they will will not um I mean I would say yes but not for that reason okay I mean I don't think that the opportunity in digital asset is around a regulatory Arbitrage

um I think that there are definitely opportunities because of the of the nature of the market how open it is you have a lot the buyers to entry are a lot lower than on on the traditional Market uh I mean any again anybody can connect to the API of an exchange and start making markets algorithmically very easily in digital assets which you cannot do on a traditional market so I do think there's a tremendous opportunity also because the market is very decentralized and therefore is very fragmented and that creates opportunity in and out of itself because the price is never 100 aligned everywhere so there are definitely very big opportunities as a as market makers on on digital assets but I don't think that the reason is the current lack of of Regulation if anything I think that the the lack of clarity on the regulatory side is

actually more of a of a hurdle to the growth of the space rather than the root of its opportunity okay interesting yeah I think that's definitely um definitely the case and then I think um with with with crypto in in particular there's I think the opportunity is really big and there's a lot more space for more players to come in actually I'd say um if we if you look at the FX business in general there are maybe 40 or 50 big Banks investment Banks or so Each of which acting like a market maker in the FX space right so if you try and look at that analogy into the crypto markets there's they're not that many players there really who are on that same order of size type thing okay so what would are there you know bigger spreads in the cryptocurrency

market I mean since some of you come from traditional uh Market making on traditional markets and you've kind of come into the crypto space now that would make me think that there's there's more money making opportunities there maybe because those 40 50 large players haven't come in so how you know how do market makers make money uh maybe Mark we can yeah but that is actually the first thing you said is another difference between the crypto space and the traditional finance that there's so many exchanges that's I guess maybe the depth on each exchange is is smaller than you would expect in the traditional Equity Market but if you aggregate everything it is really very very liquid in most tokens I guess in the bigger ones

your second question how do market makers make money um I thought about it I've had that question before um but if you if the price is let's assume the price stays the same right and we are the best bids and we are the best offer and there are people happily buying and selling then we earn the difference right so that is that is something we can do then the magic starts when the when the spots or when the underlying begins to it gets to move and that's where the algorithms and the computers take over because how are you gonna adjust your well you're gonna adjust your price of course

but are you gonna and you just bought and are you selling out or are you buying more and that depends upon a whole variety of related products for instance that is all going to be quickly calculated and then you well it's all automated of course but then the algorithm decides what what's your next step is so are you gonna aggressively get out of the position that you just traded in and that's losing money or guy are you going to accumulate more because you think it's gonna go so there's some kind of a very short and price prediction in the in the trading models that make sure that you can always stay with a pretty close uh small difference between your bid and your ask in in all these products at the same time and it

can happen that you adjust your price here because you are trading there okay all right if you're buying here you always you don't have an opinion on the market you don't say yeah I hope we're going to buy Bitcoin today because we think it's going to go up if we buy Bitcoin here we're going to sell something else there and maybe it's not even trading but we will adjust the clothes so it's going to be more likely that we sell it there and then maybe our dollar Delta is flat again that's also a term that's quite common in market makers so even though we call it Market making it's not really a uniform strategy each market making firm has its own algorithm for sure for sure yeah okay and then it's kind of like over time some algorithms will do better than others some market makers yeah insole market

conditions okay yes I think like I think the the points there around how what a market maker does so you know they have to manage inventory and they have to think about their fair price um so if you look back at that example with the classroom you know maybe the market maker there would realize that the the price tend to spike after pocket money day you know everyone's trying to buy the toy and so on and with collapse just uh before the sweet shops open or something like that in this classroom example so you know part of that as a market maker you to manage your inventory you've got to be thinking about what can be possible triggers for moves in the market and position yourself accordingly you don't know what's going to happen but you're going

to give yourself a Best Shot for that and I think that's typically the case in the less liquid tokens where you know supply and demand are really hard to track and I think that what you said actually the different market makers are going to have different different strategies different risk profiles different ways of managing their inventory is one of the reasons why you know when working with token issuers for example we always advise to work with more than one because it is in the interest of the market to not have only you know one market maker active on it because you want to have that diversity in Risk profile the diversity and risk management that actually eventually benefits the market which of course is in the interest of the the token issue okay I think I think and so

so Point you're saying um Kevin that basically tokens come to Market with a market maker or they can engage a market maker to provide liquidity for them on say an exchange like binance or buy bit and then on the or do they come to you with they say we know the exchanges we want to be involved in and this is where we want to go live and this is the like we want to have it with this Fiat pair you know Australian dollar on this exchange or do you guys come to them and tell them what you know what the strategy should be for Market making or how do you approach a client like or how do they approach you I mean there are as many um as many answers as they are individual token

issuers basically right but I think that what is interesting there is first is understanding why is it in the interest of a token issue to have market makers active right and we we explain what liquidity is but why is it interesting why is it important and the thing is that having a very liquid Market benefits all Market participants because if you have a very liquid Market what it means that you can have a very tight spread so it means that when you do a market order and you cross that spread you're basically going to be trading at the cheaper price and if you had a very wide spread it also means that if you all of a sudden want to execute a large order and you want to sell I don't know 10 Bitcoins 100 Bitcoins you're not going to move the price by five percent

because there's nobody that wants to the opposite trade so you have you end up with basically a market that is more fair there's more efficient there is less volatile there is less prone to manipulation so all of those things make it interesting and actually important for token issuers issuers of assets actually asset insurance with market makers working with them some of them come to us some of them we go we we go to them right some of them are listed already and they want to the markets to get better some of them contact us before they even get listed so we can help them on you know advising where to get listed uh one exchanges many exchanges which pairs how to get started so there is that's part of our of our job as a as a service provider to

to answer very different situations basically interesting so yeah I can't remember one of the projects I was advising at some point they wanted to get listed on an exchange and the exchange said well who are your market makers and then they they said well I don't know we don't and then they said well we're not going to list you unless you can tell us who your Market maker is so is that pretty common that the exchange expects the project to onboard with the market maker definitely especially okay and it makes sense right so for the market make and for the project and for the exchange you're all on the same side because you all want a nice tight Market in that product so everybody can trade it and the exchange wants the volume we want the volume and they want yeah Kevin said they want

lower volatility and same price on different venues so it doesn't matter where your account is sitting if it's bits democrick we have to make sure that you pay the same price more or less and you sell at the same price okay so would you say that there's kind of like two broad categories of market makers basically like the prop desk market makers that are trading with their own money they don't get involved with token projects they don't take on uh external investor money and then there's the second type of Market maker which is kind of working with tokens they have clients they're you know they kind of have mandate or they have some type of you know Arrangement um would you say those are like the two broad types of market makers or are

there others well you have three types one that only do prop trading one that they only do trading at the token Market making and some that do both um I guess we all three do both and it helps they help each other because because we do quite a lot of volume on the main exchanges we are very high at the feet tiers so we have we trade cheaper than with Voodoo without so on that maybe just through their phone on our side we really focus on the service side of things so all the markets that we make we actually have a dedicated contract with either the issue or the exchanges that's really our Focus

you have a contract with the exchange or the contract with the oh the issuer or the issue it depends on the market right okay like the things that a contract with the exchange can also be just part of their dedicated Market maker program okay which is available to anybody that wants to trade high volume right and so that creates kind of a partnership with the exchange but that's really what we currently focus on and what does high value mean like give me an example of an exchange and what I would need to do on a daily basis in order to be part of their Market making program I know I think I don't know binance vip9 is a is hundreds of millions per day I think 100 hundreds of millions hundreds of millions per day to be part of their VIP program so you have different tiers

right yeah one two three four and but that's and then it's on the website of binance and the tears the tiers of market makers mean you get better fees exactly the more volume you trade the lower your fees I mean interesting okay so um now does that mean that you have to each of you has to keep inventory on all the different platforms that you're on mm-hmm yeah that's right there's some there are some solutions now I guess like uh um which have off exchange balances I think binance says a solution and copper as an example and other places but yes they have a solution so you don't have to keep full inventory on their platform I mean because that seems like it would be quite a large risk for a market maker if they've got liquidity on FTX or

exactly yeah other ones you know I mean so how do market makers kind of protect yourselves from that I guess you can't overall I mean it's probably I'm sure the biggest fear that we all have that that one of the exchanges goes down and uh you know you have to do your best to to front to get to to be ahead of that of that um situation but sometimes you just can't know I think yeah but it is true it really you got to be kept efficient some exchange we won't touch yeah and uh and on smaller exchanges you typically need less Capital because you can assume that the risk is there a bit bigger but you can never be sure but this because also just go get it back to what you first said

um both prop trading well by definition but also toggle marketing is on our own book with our own capital so that is that is similar so I don't want to drop any names but are the are there any exchanges you want to mention that you're not willing to Market currently I see a sniper in the audience they're always too dangerous to say that no that would be really bad because then if they have a token we could like you know do some things but great okay maybe actually you mentioned the difference between traditional finance and crypto and digital asset that's a very big one by having exchanges that do both Marketplace like exchanges are marketplaces but also they do the custody that's not something that is common no existing at all no in traditional fun and something that is a

very specific risk to make markets in digital assets that the exchanges are doing both for example is is that what happened with the big blow up I mean custody and they were they were doing I mean but just that's not an exception of FTX like most most exchanges today in digital assets as you say you need to put your assets there yeah so if the exchange goes down as did FTX you lose your assets or you hope to get them back at a later date depending on how good and cheap the legal team working on the unwinding is but that's another debate but um so yeah it's that's exactly what happens so if your Market make on Robinhood for equities you don't have to keep your your inventory on Robinhood or like if

you're interested before in any traditional Market you who keeps your inventory a custodian Bank like Deutsche Bank or somebody keeps it and then you have an API that tells them what like your algorithm goes to the exchange and exactly so you have a separation between the marketplaces and the the custodian and then you have clearing and settlement that happens you know on the on a variety of of time frames but you have a Reconciliation between but exchanges don't do custody usually so Market making on crypto then is riskier for that yes I guess there's two points that though because in crypto at least you know pretty much your risk so if you've got a million deposits on the exchange that's your risk but in traditional Finance usually you can get margin calls

so you have a you have you know if you've if you've um if a trade particularly goes wrong on one on traditional Finance you can get margin called for even more so sometimes it's hard to kind of bucket your risk in that case in Tradition fine okay but I think this whole point though is probably a talking for market makers it's it's a reason why we you know it's a service and we need to get compensated for that because we're taking risk and having to manage these things definitely so okay if I'm understanding this correctly we've got the spot price of Bitcoin we've got market makers that have a bid ask around that spot and it's going to be a wider spread on less liquid coins less liquid Fiat pairs less liquid exchanges and it's not pretty

wider but it's smaller so it's for Less capital okay and there's multiple bits and offers okay so you can put based on opposite you can put multiple bits and offers in at the same time okay for smaller size so that's what you would typically do if a token is very illiquid okay okay because you don't want to buy a whole lot at some price and then there's no one else so sometimes it's nice as a market maker to have other Market maker support so there was also something you said it's sometimes good to be to have multiple Market makes on the same token because then you can yeah well you can just make it more stable if you all work together in a way well you don't go over

you don't do that but you don't make deals or anything but you do all put your bits in so it's it's one of them as I said one of the main reasons for this token Market making is that you want to lower the volatility interesting I mean that's what's happened in in traditional finances as well as and so if you can use FX as a template I mean I remember uh 15 to 20 years ago it was really a liquid and it was much less liquid in FX and people would be much less electronic trading there was visible Arbitrage uh the spreads were wider and then over the last uh 10 to 15 years things have become a lot more electronic there'll be a lot more participants in the market and things are incredibly tight there now like euro dollar for example quoted at fractional basis points which is

really really tight so exactly like what Mark was saying the more that we get market makers involved in the market the more um the competition is good for the market the more efficient the market yeah exactly okay so as like a just a retail Trader that I'm on binance and I want to buy a coin if I see a lot of volume in that coin and even some of like the screener tools there's you know some of the you know Buy sell strategies people have is based on volume you know so people are like looking at volume if it's a small coin with no volume maybe they're not so interested if it's a large coin with a lot of volume they're thinking oh people are interested in this but maybe behind the scenes it's just market makers trading with each other so how do how do we know if it's

like real volume I mean well yeah we're not interested in trading against other market makers but you do sometimes you do sometimes yes and you don't know but it's not where we will it's a zero-sum game right you don't make money then so I can't imagine that there's there's if Pepe is number two on balance on the day which is crazy I think yeah that will not be market makers trading with each other okay okay no okay because it seems you'd see contracts with market makers too but trade against each other it's like Market manipulation almost right yeah if you're just people making markets

you're a market maker yeah you're not the market taker okay so the reality if you have you know two makers on The Price is stable you don't have trades so you have five market makers what you see is an order book that is very full you have great outstanding liquidity you see the price is going to be stable but that doesn't just create volume in and out of itself right because you're a maker not a taker and to have a trade you need to have both okay so it makes having a lot of market makers in the book makes it more efficient for takers to participate as well and that's what creates volume okay but that is very real because it's not what you have as well and that's another problem you know maybe modeling to the earlier days of crypto but that does happen still is watch trading where it's

just one entity trading with itself and that is completely fake right yeah but if you have market makers active in the market that is really effective volume so as a market participants you have that efficient execution that you want to have because you are effectively have counterparties to trade with okay and watch trading basically explain it to me like I'm five maybe if anyone wants to take that question they're just trading against yourself to create fake volume can you also like spoof markets where like you make the order wall look big and then you make it disappear I mean people can do that okay it's another type of Market manipulation so that's not wash trading watch trading you actually execute like a trade goes through yeah okay trading fake volume on

the thin air basically okay and now is Market manipulation illegal in cryptocurrencies because they're not Securities right so is it a gray area really illegal illegal totally legal legal honestly I don't know so it's going to depend on which Market that I also don't know I guess it's it's it's it's it's it's it could be a criminal activity I mean you shouldn't do it right I don't know if it's illegal because you don't have but exchange must have rules and regulations around it yeah I can imagine like for a large firm like IMC that's got a traditional [Laughter]

but maybe maybe me with my market making bot in my mom's basement I can do what you know nobody bothers me or something I hope you're not on camera okay so let's about hedging like it's some Bitcoin low selling some Bitcoin high and you know the market moves against you you also risk losing part of your inventory right so how do you kind of take away some of that risk maybe let's start with um Kevin yeah so um I mean definitely we we do head right and that's what I was saying as a maker you are naturally against the market so to speak because you are there kind of with orders that

are just sitting at the price it is well known and therefore you have a disadvantage and so indeed you do end up you know taking out position long and short that you that you want to get out of so you do hedge there are multiple ways of doing that so the first one is the most basic if you trade you know you trade Bitcoin Euro on one market there are 15 others because as Mark said there's many many listings on the market and so what you take on one you can maybe get out of on the other because the market is not 100 efficient and liquid so there are ways to just hedge same instruments same thing simply on another exchange um you can also hedge the you know on on another Fiat for example so something you take on bitcoin Euro you can hedge on bitcoin

Bitcoin dollar and then do an fx trade to to get back to a position that is fully neutral you can use different instruments what you do on spot you can use perps you can use options you can also go a bit further if you are long Bitcoin and designed to short ethereum to be sure ethereum you do get some type of hedging that is not perfect that is not complete because they're not fully because there is some correlation between similar assets I mean Bitcoin and ease might not be the perfect example but that's that's the logic right so there are a variety of ways to be hedge and I mean speaking for key rock as we basically want to always to be hedge and be delta neutral in our activity so we're not in the business of accumulating position and taking bets on a certain asset going up or down okay

that's not what we do so you're not saying like I think bitcoin's gonna go up and taking some so you're always trying to hedge out and you have like when your algorithm does one trade you your another algorithm does another trade yes with Margaret saying if you buy on the right you're going to secure a price on the left so that you increase the probability of you getting out of that position to go back to your neutral interesting so I mean it really is competition between the market makers to see who friendly friendly competition and and our market makers like hiring quants to figure this stuff out or who's who's coming behind the scenes to build these algorithms I think uh there's lots of people from traditional Finance who've made the move across I think especially as Bitcoin and ether get more

institutional adoption and they fit into the sort of um General ass cross asset framework they think you can even think about it across asset of how uh you know Bitcoin ether could be correlated with other asset classes so I think there's there's a lot of folks who've come over in the last three to four years from traditional finance and some very clever folks including a G20 is there like any book if there is one I wanted like Market making 101 by somebody that did really well with that strategy or something is there any book or there's like I can't think about that because there are many many yeah it's a recommend one it's uh but you can't get a degree in Market

making like well we still have some time I'll come up with an answer at the end okay so let's move on to the the segment of this talk which is on the shocking and ugly side of Market making okay so what are some of the shocking facts about digital asset Market making that most cryptocurrency investors do not know open the floor um but I think the Armenian we discussed part of it right we discussed what's trading we discussed price manipulation and those are how some of the the early size right I mean we started I said we started key work in 2017 focused purely on on digital assets and back then actually still now the first the first slide in our sales deck was what we do not do so we don't take price targets we don't create fake volume we run so the

reason we had to say so is because it is something that was happening on the market that is largely unregulated so but the thing is that unknown is that shocking I don't I don't think so it's something that is is known that there are some bad behaviors out there um but I think what matters is to they understand the reason for Market making the purpose that it serves and what actually you know good actors are providing in terms of added value to the market and also as I said hope that the the regulatory framework is is clarified more and more so that's not only bet everything on the Goodwill of vector but you actually have a very clear framework that tells you what Canon cannot be done and be assured as a market participant that those practices are not taking place anymore I think the other thing is that the the

question uh has more I mean it's interesting in 2023 to look back at 2022 which saw a lot of the shocking things happen all in one year um with you know lunar ust's FTX the crypto crash and so on so I think you know there was a lot of shocking events that happened even for you know experienced Market players like ourselves last year I kind of as many black swans as you can count it's kind of nice to have a few months of note of white swans for that thing at this moment I think I can add two things that people might not know about market makers not so shocking but one is that with a lot of exchanges we have obligations to be there a certain percentage of the time so we're just not

there for fun having our bits and offers but we sometimes have just agreed on on providing that liquidity almost at all times and the second thing is that sometimes in a certain uh token we are like counterpart to do every second trade the the market volumes we do are really huge and and it's just especially there's less liquid drones it's just that's that's in in threat fire you don't have that at all so we do Market percentages sometimes that are that are you know that are really incredibly big so was Alameda a market maker maker or were they just doing proper I

mean what was what were they what was their objective were they Market making on FTX is that was I mean was that the main object did they have like I think it started like that yeah okay it started like that okay but then it went into another Direction yeah the fraud Direction so they've lost money with their Market making and then they said well we're just going to borrow some client assets try again and then they lost it again yeah or something I don't know it's not this thing what really happened underneath the hood but okay I think I think um from from our perspective and initially they were I guess fairly a fairly okay counterparty and we never had anything negative to say about them but then behind the scenes there's probably a lot of um you know Insider information flowing

between the order books on FTX bailouts of any bad positions and so on it seems It's hard to say exactly but yeah I mean it'd be it's if you have The Insider information you'd think you'd have a better chance at succeeding but um so maybe maybe not um so I mean in traditional markets right like they guarantee best execution right like you you kind of you you you're on Robinhood you want to buy your game five or your um game stock or what was the Game Stop or something if you want to buy your stock and they the The Regulators have kind of made it so that you can't you know charge too much on that or you know they want to they want to get it

executed at the best the best price but that that regulation doesn't exist in crypto yet is there any regulation that's on the horizon that's going to try to do something like that or I do best execution for Market making or would that help this Market or would it hinder it how would in Europe so that's the start of Regulation right so I think it's really good and it's so yeah more than a year away but and some say that we'll kick in and but best execution is not part of that because it's also really really hard right there's so many platforms about what are you going to do about dexes I mean it's just who's gonna make sure you can't promise best execution I don't see it and you also

like we've seen the regulation on traditional Market on best execution is also things so you know in the US you have one National Market so to speak you need to guarantee the best execution on that one National Market in the case of Bitcoin it's traded you know in hundreds of exchanges everywhere it's super fragmented so it is just simply something that is not possible to align on a on the worldwide scale basically so it's not something that is in the plan of of Mika or other regulation that I know of okay that yeah that makes a lot of sense so it's fragmented market and so best execution will be very difficult to ensure in trying to trying to force market makers to stay in the Market at all times or so um finishing up this panel how does the future of Market making look I mean the the the panel is called

the next generation of Market making and liquidity Provisions so I mean in five years when we have this panel will it all be automated market makers and bots on this panel that are talking to each other and or will it still be people it will be ai's night yeah no so I think that's a really big area of what the future holds for for Market making I um crypto Market making the cryptocurrency market in general is still pretty young compared to its traditional Finance counterparts I think the two areas I guess that we're really excited about are non-dollar liquidity so I think what we've seen in up until now is that most of the liquidity is is versus a dollar stable coin or against dollars and I think

um as the market matures we'll probably see a lot more cross-currency um crypto quotes so against Euro against um you know any other currency you can imagine uh so I think that would be a big part of it and I think the other part is around the options Market in general it's still really nascent and and small in comparison to what is in traditional finance and and the crossing FX as well in in on that side so I think we'll see a lot more altcoins appear on the option side I think that will really help liquidity as well so at least two points yeah about the robots I mean I'm not worried about that at all but I I we people at IMC use jet GPT you can

even code with it you can let it write your email so it's it's a good tool in many ways but it will so it might speed up developments and then I guess that would only be more people needed right to keep to keep up with that and I think that replacing us I mean it's we have feelings creativity intuition I mean I don't think a robot has that and I think I like to think that's important parts of our job as so so basically you're saying that with automated market makers possibly you know we're still going to need people to decide where to deploy those automated market makers on which exchanges with which liquidity pairs like they're still

going to be people behind the scenes that have to constantly stay on The Cutting Edge what do you say about amm so like amms and crypto like it's it's interesting like when you know it started to become more prevalent like those automated market makers people would always ask me like also you're about to be replaced but the reality is that a name is not the type of Market you still have people that provide equity in those pools when you do you are facing with potential impermanent losses which means that you need to help whatever you do there so at the end the way that we look at it we trade on we trade on amms we trade on centralized exchanges uh we will trade in the next type of Market that will emerge there is still a need for counter parties to provide that Equity they just it doesn't

just magically happen and when you do that all the time on markets that are also not very liquid but there's a high volatility and so on and so forth you need to be very good at it and you need to know how to manage your risk otherwise yes you can do it but you will eventually go bust so I think that is what we've seen with MMS which is another type of Market in which we are active as well and that the thing is that is going to continue basically excellent well thank you so much for uh all of your insights on Market making today and I hope that anyone that's interested in learning more about G20 or IMC or key Rock and speak to these panelists after the panel which is right now yes let's give it up for our panelists and we can talk more liquidity

on the boat cruise that is being hosted by IMC trading thank you so much for making this amazing experience happen for us this year thank you