OTC

Cumberland took a big step to modernize its market — here’s our conversation with its head of OTC Bobby Cho

Quick Take

  • Cumberland has rolled out a new platform to allow its customers to trade electronically 
  • The following is a Q&A with Bobby Cho, head of OTC at the firm

DRW’s Cumberland is among the most notable trading firms in the nascent digital currencies market. The firm trades dozens of cryptocurrencies via its over-the-counter trading operation, which has been up and running since 2014. Now, the firm has gotten a major facelift that will allow it to engage with clients electronically, the unit’s head Bobby Cho told The Block in an interview. 

The firm’s new platform, Marea, will allow its counter parties to trade with Cumberland via a new graphical user interface. It’s a move that follows its Chicago cross-town rival Jump Trading and other market makers in crypto that have modernized their marketplaces. 

“We have seen a notable increase in the OTC crypto industry’s appetite for electrification through single-dealer networks and trading platforms, which is an evolution that we’ve seen in FX in the past,” Edward Woodford, chief executive officer of SeedCX, told The Block. 

The crypto OTC market is known for operating much like FX markets in the 1990s — with much of the trading conducted over the phone or via messaging apps such as Skype. OTC desks are also known for handling some of the largest trades in crypto as concerns about exchange liquidity hang over the space. Still, the market is known for its opaqueness and counter parties have to trust that dealers like Cumberland will properly vet other counter parties

As part of the Marea platform, Cumberland will offer trade reporting services. The firm will also add research to the platform. 

Following is a conversation between The Block’s Frank Chaparro and Cumberland’s Cho. It has been edited for clarity and length. 

Chaparro: So let’s dive right into Marea. How long has this been in the works?

Cho: Yes, we have been building this thing for quite some time — upwards of about a year now. We tried to model it after a bank’s single dealer platform that they have out there. We got a lot of feedback over the past year-plus regarding our counter parties’ experience with us. One of the glaring things to us is that our counter parties wanted to trade in different ways with us. So we had this historical business starting in 2014 of counter parties wanting to trade OTC with us in chat. That evolved to “hey, we actually want to trade with you electronically.” And that spun out and we started providing an API and now what we are announcing today, Marea. 

So we are opening up with 10 coins against USD and BTC as one of the cross pairs. We are actively looking to add more coins to that. Along with more fiat denominating pairs. The goal is to eventually get to a point where you are able to trade any of the 40 coins we offer against any fiat pair or against those coins themselves. That means we could offer upwards of 500 markets. We want to walk before we run here, but I’m sure we can support everything we already support.

Chaparro: So will folks still be able to engage with you in the traditional way?

Cho: Absolutely. And it is the same market people have been seeing through chat since 2014. It is just a different way of people interacting with us. From the settlement and clearing side of things, it’s all the same, but this allows the active traders to just see our market streamed to them in more of a UI format. And then they are able to see the differences in price. So then they are able to actually get some direct feedback, related to what different sizing would look like for different markets.

Chaparro: What type of counter parties would prefer to use the GUI versus the traditional chat function?

Cho: That’s a good question. The more active traders who don’t want to be monitoring a chat when they’re also looking at markets would probably be more of the ideal kind of counter parties accessing this. But also some people just don’t log into Bloomberg chat, or to Telegram or to Skype and they say, ‘well look, I just want to be able to pull up this bookmark link and see your market’. They might not want to trade but they want to see the data behind it and what the markets are looking like today versus yesterday.

Chaparro: Do you expect new types of counter parties to enter the fold?

Cho: You guys have obviously put out some pieces on some of the larger investment managers and pension funds that are getting exposure to the space. But we really cater to those who want exposure to the space and access to the underlying coins. If anything the interest we are seeing is through these channels. I still think there are hurdles around how people are custodying coins, how people are interacting with coins. But in terms of the current ecosystem, for us, we have always been more directed towards the funds and some of the larger trading folks in the space. And I don’t see that changing too much.

Chaparro: I imagine you tapped into the knowledge of the crowd to build this. What was one of the most striking things clients wanted in this product?

Cho: Any person you ask is going to have different feedback for something like this. So we tried to aggregate. The thing that didn’t surprise us is what the front-desk wanted. What the traders wanted. They want to see the market, they want it to be dynamic, they want as many coins as possible. That’s what we do day in and day out. So that’s an easy lift. We understand the pain points. What slowly started to creep into the conversation is the fact that crypto is becoming more of a fabric of the overall corporate environment at firms like ours and our counter parties. Now you have middle office and back office functions that have been built out for crypto. So there are a lot more stakeholders in the conversation, whereas before traders would just trade crypto and they would just go ahead and settle and clear this thing.

But now you have some defined roles out there in the ecosystem, whether it’s custodians, administrators, or other functions like that. The glaring feedback we had received over the last year was hey, let’s not build this in a silo, let’s build the full stack in collaboration with these folks. And so reporting was a big piece.

Chaparro: The crypto derivatives market is heating up. Is this an area Cumberland could gatecrash? Are your clients looking to trade futures, swaps, or other products through you?

Cho: There have definitely been a number of counter parties who have inquired about derivatives and other products like that. And we explore all of these internally. So the interest is definitely there. I would say we continue to field interest, but we are mainly focused on Manrea and building out the spot market. 

There are a number of players coming into the space whether it is Bakkt, ErisX, or SeedCX. We will continue to watch them grow and capitalize on those opportunities on the exchange side of things. In terms of OTC, there are many known risks related to derivatives trading. At the end of the day, we manage risk. We will be looking at delta risk and product risk — those are all things that we try to examine before going ahead.