Enticing Institutions to Crypto, Building World-Class Exchanges

Our interview with Marshall Swatt, Founder & President of Swatt Exchange, is out (iTunes, Google Play, and Stitcher)! Marshall talks about building his 3rd exchange, this time catered toward institutional investors. We discuss what is required to entice institutional money to enter the crypto market.

Highlights below:

How Did You Become a Serial Fintech Entrepreneur?

This is Marshall’s third exchange. His first exchange was the result of working on a small team that developed Citigroup’s institutional FOREX trading platform, Citi Velocity. The exchange grew to handle several billion dollars in daily trading volume.

In early 2013, friends took interest in Bitcoin and prompted him to take a closer look. He was intrigued with the technology and noticed only a few exchanges offered a venue to trade Bitcoin.

Marshall then built his second exchange, Coinsetter, in July 2013. He oversaw Coinsetter’s acquisition of Canadian Competitor CaVirtEx before selling the combined company to Kraken. Then onto his 3rd exchange.

Other than Coinsetter, there were others like Mt. Gox and Coinbase. Marshall wasn’t surprised that Mt Gox was going to crash given recurring problems and other peripheral issues. Building an exchange is a tall order so they bit more than they could chew.

Why Set Up an Exchange in the U.S.?

Setting up an exchange in the U.S. gives people reassurances that they have formal protections and under a regulatory compliant framework. This country has highly liquid markets. There are customer segments who may not be comfortable depositing funds with an exchange overseas in Malta or Tokyo.

At the end of the day, we need to build digital currencies that are complementary with fiat. To be sure, fiat currencies historically have been inflationary but there also proven mechanisms in place to foster price stability (institutionalized over the years). But there are always political risks or corrupted governments that can manipulate currency markets and undermine market confidence (e.g. Venezuela).

What Have You Learned Having Built Several Exchanges?

Markets and technologies exchange. Back then having one pair trading like US dollar-Bitcoin may have been sufficient, but now customer appetite demands for much more than that (at least the major currency pairs).

Marshall is proud that their Coinsetter exchange had API integration that institutions could plug into. Also, the exchange operated for several years without facing a data hack or funds stolen. Part of their strategy was investing in building enterprise security rather than aggressive revenue generation.

What Customer Segment Does the Swatt Exchange Serve?

Swatt Exchange, his 3rd exchange, doesn’t focus on retail customers, but rather institutions. True, many exchanges today are catered to retail customers. For institutional investors like hedge funds, they face different custody requirements when they want to deposit large amounts on an exchange. They have to use a qualified custodian so exchanges need to provide proper custodial services. Large investors also need access to reliable customer service. As we’ve seen, retail exchanges like Poloniex wouldn’t be able to provide that high touch customer service, especially when volumes spike.

The Swatt Exchange wants to be different by offering trading systems that are compatible with legacy protocols that financial institutions are familiar with. For example, they have the FIX protocol in mind. FIX refers to Financial Information exchange protocol which standardizes messaging protocols in capital markets. It’s used for communications between investment managers and brokers. Salomon Brothers and Fidelity used the protocol for equity transactions in the early 1990s.

Is the Herd of Wall Street Coming to Cryptocurrency Markets?

Marshall believes that long-term Wall Street will see the value of crypto markets and will make substantial investments, but he’s not optimistic about the timeline like others. He still thinks there are some solid challenges to work through before institutional players will come in at large scale. CME introducing Bitcoin futures is cash settled so they don’t really need the operational resources to directly hold Bitcoin (therefore no custody problem or counterparty risks with crypto exchanges). Then you have Goldman Sachs exploring an over-the-counter crypto trading desk so they can hit the ground running.

Are Decentralized Exchanges the Future?

It’s an attempted solution to a problem of people feeling insecured about capital being parked on centralized exchanges. But this doesn’t necessarily mean decentralized exchanges are the better solution given their high latency. Centralized exchanges are built to aggregate liquidity.

In modern markets, exchanges with deep liquidity must have extremely low latency. Trades are executed quantitatively through algorithms which is dependent on ultra low latency systems with market making. If there aren’t ultra low latency end points, the exchanges can’t thrive in the current market landscape. It’s hard to see decentralized exchanges reaching volume capacity that matches the power of centralized exchanges any time soon.

Links:

Twitter: @marshallswatt

Credits:

Hosted by: Jeff Peterson, Alain Leon 
Chief Editor: Dang Du

Intern: Yidu Wang

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Podcast: iTunes, Google Play, Stitcher