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A price war is heating up in the crypto market, and 2 exchanges are leading the charge

Quick Take

  • Seed CX and LMAX Digital have stood out among the crypto exchange pack for their low fees
  • Seed CX said on Thursday that they offer the lowest costs relative to exchanges in the U.S., considering fees and slippage
  • Market experts say the market is about to witness major fee compression as competition heats up

We are at the precipice of an exchange price war in the market for digital currencies and two little-known exchanges are driving the charge.

Seed CX, a digital asset exchange aimed at institutional investors, boasts some of the lowest costs to execute a trade in the nascent market. The firm, which operates a spot bitcoin market, said on Thursday that clients using its exchanges are getting a better deal trading on its venue compared to rival venues.

Analysis for certain trade types reviewed by The Block confirms this assertion.

In trading, there are specific trading fees which are typically transparent and outlined on so-called fee schedules, but there are also variable costs such as slippage. Slippage, to put it simply, is when a trade is executed at a different price than the trader intended. Typically, this is the result of illiquidity. As for trading costs, specifically, Seed CX offers competitive pricing relative to native crypto exchanges.

U.K.-rival LMAX Digital offers even lower pricing, according to its fee schedule. Take fees can be as low as 2 basis points for takers on the venue. LMAX Dgitial, a unit of FX firm LMAX Exchange, was not included in the data reviewed by The Block. To be clear, Seed CX offers automatic settlement as part of its services, whereas LMAX Digital offers bilateral settlement, which is a more manual process. 

Still, at 8 basis points, Seed CX’s fees for traders trading less than $10 million per 30 days is more than half that of Coinbase Pro. For a comparable trade type, its fees are 2 basis points less than Kraken and itBit. All things considered, Seed CX offers a cheaper place to trade versus Kraken, Coinbase, Gemini, itBit, and Bitstamp for certain traders moving 30 to 100 bitcoin. To be sure, Seed CX only trades the most liquid assets — ethereum and bitcoin — whereas other exchanges trade a wider range of less liquid assets, which may contribute to slippage. The ability to trade a wider range of assets could be behind the higher fees at other crypto exchanges.

The discount Seed CX and LMAX Digital offer may not exist forever, however, as fee compression grips the rest of the industry, says Greg Tusar, the cofounder of institutional cryptocurrency broker Tagomi. 

“I think there are many catalysts that will lead to fee compression,” Tusar, who previously led global electronic trading at Goldman Sachs, said in an interview with The Block. David Mercer, CEO of LMAX Exchange which operates LMAX Digital, is of the same opinion. 

“Compression will come from supply and demand. I fully expect crypto to trend toward Equity and FX commission models in the next decade,” he said. He added he’s not concerned that it will make his firm less differentiated, adding “Current retail led fee schedules are not sustainable in an institutional capital market. Investors and real money clients will expect added value for high fees not just simple matching of orders and access to liquidity.”

As for what will drive compression, Tusar said “it comes from the need for exchanges to survive, achieve greater scale — especially as it becomes more of a scale game.”

“The entrance of electronic market makers, a difficult environment, and consolidation is what drives down fees,” he added. To be sure, native crypto exchanges aren’t resting on their laurels. 

Tusar noted that a number of exchanges are improving their infrastructure, which could bring down the variable costs related to slippage. Coinbase has been building out its new matching engine infrastructure out of Chicago offices. There, the firm boasts a Wall Street-clad team, led by Paul Bauerschmidt, who formerly led CME’s Swap Execution Facility.

Andy Bromberg, the president of security token platform CoinList, agrees with Tusar that 2019 will mark a year of fee compression for cryptocurrency exchanges. 

“I think the thesis is right,” Bromberg said. 

“Exchanges trend towards lower fees and trend towards consolidation. We haven’t really seen this not be the case.”

“Margin compression happens because firms get closer together in terms of feature set. Exchanges are doing the same.”

Tusar noted his firm, which helps its clients identify the best exchange to execute a trade, will benefit from lower fees. 

Tagomi is not alone. Fidelity Digital Assets aims to launch its own execution business to help clients trade across different markets later this year. 

As for how low fees will go, Tusar wouldn’t provide an exact number on the record. Still, he compared the crypto market to equities, saying “Let’s say that the average take fee in equities is 10 mils and the average stock price is 100. That’s a tenth of a basis point.”

“All of the same forces are at play that brought equity trading cost down. That took eight years. It could take a fraction of the time for crypto.”