Multi-dealer platforms for crypto are the future, but competition is fierce

Quick Take

  • Both traditional asset management firms like Fidelity and fintech startups like Tagomi are trying to offer brokerage services in crypto, stoking up the competition
  • These new players entered the crypto market with plans to develop the multi-dealer platform, a one-stop shop where investors can manage all digital wallets at once, locate the best price, and settle transactions 
  • There is no clear winner in the crypto brokerage space at the moment, although more firms will likely follow suit as investor interest in cryptocurrencies grows

Both Wall Street giants and financial services startups are trying to gain first-mover advantage in becoming the one-stop brokerage shop for crypto assets.

Bloomberg reported on Monday that asset management behemoth Fidelity will roll out its bitcoin trading business in a few weeks, signaling a shift in how trading will be handled in crypto.

Traditionally, large investors would have to trade their coins solo or engage with over-the-counter (OTC) trading desks, which is clouded by difficulties in locating the best price and finding the right buyers or sellers. With brokerages like Fidelity and Tagomi entering the fray, crypto is evolving similarly to other traditional asset classes with so-called multi-dealer platforms moving to front-and-center.

“A lot of people are trying to accomplish this (providing crypto brokerage services) and it’s been going on for a couple of years,” crypto trading firm DV Chain CFO Paul Bialobrzewski told The Block. “Fidelity is obviously coming to the game a little bit later but obviously they’re taking a more measured, more institutional approach to this.”

OTC versus multi-dealer

In crypto OTC trading, a firm — perhaps a miner — might come to a desk to sell $100 million in bitcoin. The OTC desk in that situation would effectively take the other side of the trade — sometimes pulling from their “book” of other counter-parties — for a fee. The model has its risks, as noted by Reuters’ Anna Irrera and Jemima Kelly, who wrote last year that such trades are often not independently audited. During the settlement process, there is also a higher possibility that one party may be going into default. To boot, OTC traders also don’t necessarily have the most advanced technology. Indeed, many are still using Skype and online messaging to conduct deals.

“When I used to run an equity fund and a fixed income fund, we didn’t think about trade execution. We thought about the best price,” said asset management firm Arca CIO Jeff Dorman. “And in crypto right now, that’s not always the case because of how difficult it is to move assets around and the speed in which you could move it around… It’s going to take me an hour to get money in there to do the trade, and by then, the opportunity is gone.”

To solve these problems, firms like Tagomi are trying to integrate capital management across different accounts, trade execution, and post-trade settlement together on one digital platform. Unlike many OTC desks, which connect buyers and sellers on a one-on-one basis, a multi-dealer platform can also route orders through several trading desks and exchanges to locate the best price. Simply, a multi-dealer platform aims to be the one-stop marketplace where asset managers can focus on trading crypto at the best price and handle settlement later.

“This idea of this multi-dealer platform with this prime broker type model where you get to just do what you know is best and figure out the settlement later is a necessity,” said Dorman. “Whether it’s Tagomi or Fidelity or anyone else, whoever solves this problem is going to ultimately gather more assets than anyone else.”

Maturing market, shrinking fees

The reason multi-dealers are finally coming online can be tied back to one word: liquidity. To date, the fuel behind OTC desks has been the lack of liquidity in the market, which has allowed such firms to make money out of the high spreads between the price a person might pay for a coin and how much these firms can sell it back to the market for (or vice versa).

As the crypto market becomes more liquid, those spreads shrink, which makes the model less profitable. According to Michael Moro, CEO of crypto OTC firm Genesis Global Trading, the increase in liquidity makes the multi-dealer business more appealing.

“I think the new entrance that is coming online, such as Tagomi, are realizing that they can’t prop trade because there is no money to be made. And it’s better to be a platform provider as opposed to a trading shop,” Moro said in an interview with The Block.

Still, rather than rendering OTC traders obsolete, the advent of multi-dealer platforms could equip them with better trading technology and grant them access to a wider client pool. These platforms also rely on OTC desks for quoting price.

“Ultimately I think it will be the partnership route that is the more logical one than the competition,” said Moro. “We are much more friendly than competitive in the marketplace today.”

No clear winner

At the end of the day, crypto trading platforms like Tagomi are still in their early days. Compared to the 70-year-old Fidelity, Tagomi has a tiny client base. It also lacks the brand name and trust Fidelity enjoys, so “it’s difficult (for new startups like Tagomi) to onboard any exchange or any other wallet provider right now,” said Dorman.

Meanwhile, Fidelity is faced with its own challenges. As a Wall Street legacy firm, Fidelity has more at stake when venturing into the crypto business and takes more time to make the shift. Consequently, the firm is allegedly only going to trade bitcoins and exclusively target institutional clients for now.

In the short run, it is uncertain if Tagomi will take up a large enough market share before more Wall Street firms jump into the crypto space. Or a Fidelity-like legacy institution will acquire the smaller firm and merge it into its financial services empire.

Meanwhile, it is also possible that OTC desks could loosen the grip they once held on the market. Research company TABB Group found that $12 billion in trades occurred on OTC crypto markets every day. Whether OTC traders can maintain this volume or surrender it to the new players remains to be seen. 

“It’s still kind of a land grab and if you build a great platform and offer a lot of the services that a traditional prime broker or multi-dealer platform can provide and execute on it well, that’ll be the winner and I think right now it’s just a race to see who is able to do that the best,” said Bialobrzewski.

The Block’s Frank Chaparro contributed to this report.