What Traditional Finance has that Crypto Lacks
The blockchain and cryptocurrency industries have come a long way, but they still have a long way to go. A majority of crypto-markets lack the protections and mechanisms that investors in traditional equity markets have in place for traders. For instance, the SEC’s guidance, the CFTC’s guidance, OFAC, and — maybe the simplest and most attainable mechanism that crypto-brokerages could incorporate — A National Best Bid and Offer (NBBO) mechanism.
Cryptocurrency traders and the cryptomarket as a whole could become more efficient if traders were quoted the best bid and offer prices on the market.
Considering that not all crypto-coins and tokens are under the jurisdiction of the SEC or CTFC, it is understandable why the crypto-markets are said to operate in sort of a grey area, with a vast amount of ambiguity regarding which alphabet soup regulator (SEC, CFTC, OFAC, IRS, etc.) has jurisdiction or the right, to involve themselves in blockchain tech and crypto-markets.
And because there is no governing body or concrete set of rules ascribed to the blockchain and cryptocurrency ecosystem, there tends to be more instances of an inefficient market (relative to traditional equities markets) in cryptocurrency.
Lack of NBBO = lack of efficiency
Because crypto markets don’t have a mechanism as simple as the NBBO in place, far more price discrepancies exist amongst cryptocurrency exchanges.
An inefficient market is any market in which an assets price does not accurately reflect it’s true value, creating opportunities that allow some investors to buy and sell the asset for what can be considered “a bargain.”
For example, arbitrage is a sign of an inefficient market, and in the cryptocurrency markets, arbitrage opportunities are present across exchanges every day. If there was an NBBO, at least crypto brokers would be required to execute trades at the best available bid and ask, which in turn should make the price buyers and sellers of the asset receive relatively homogenous across the board; however, this is not the case.
What is the case is that arbitrage opportunities in the cryptocurrency market run rampant; for example, consider the price of Bitcoin on the cryptocurrency exchanges Lakebtc and Kraken.
Because the market is inefficient, it is possible for you to buy a Bitcoin on Kraken for $3819.20 (10:09 am, March 1, 2019) and then head over to the Lakebtc to sell it for a price of $4,445.97 (10:09 am, March 1st, 2019); this is a difference of $626.77! For someone that can simultaneously buy on Kraken and Sell on Lakebtc, this is a huge profit for each Bitcoin bought and sold. These arbitrage opportunities exist daily across various exchanges.
But to take advantage of an arbitrage opportunity like that, a trader would need computer algorithms, a minimum latency information network like the Bloomberg terminal, and sophisticated trading tools. In other words, if an individual is not a high-frequency trader, it is highly unlikely they will be able to turn a massive profit from the arbitrage opportunities that exist in the market. That being said, the average retail investor is not going to have the resources available to them to high-frequency trade. And therefore, we believe that cryptocurrency brokers can learn — and should implement — a thing or two from the brokerages in traditional finance.
Why Cryptocurrency Brokerages Need an NBBO
It would be nice to see cryptocurrency brokerages self regulate, or at the very least, come to a brokerage-wide agreement to make cryptocurrency markets more efficient by implementing a mechanism similar to the NBBO. The job of a brokerage is to scan the prices across as many exchanges as possible and get their customer the best possible price for the assets that customer would like to transact. So why are cryptocurrency brokers not doing this? The answer is simple: it’s because most brokerages are routing orders to their own exchange, simply to make more money for themselves… not their clients.
However, you can rest assured that Amplify’s goal is to get our customers the best price available, which in turn, should help stabilize prices across the market and levels the playing field for market participants.
The Amplify team is proud to say that we will be incorporating an NBBO-like mechanism in the Amplify Brokerage; this makes us the first cryptocurrency broker that aims to provide their users the best bid and ask price(s) available under the umbrella of a multitude of cryptocurrency exchanges.
We hope that other cryptocurrency brokerages will follow suit and implement an NBBO mechanism of their own to give their users the most efficient, fair, and optimal trading experience. Even though a majority of active brokerages are currently shortchanging their users, inconsistently pricing the assets they host compared to the market-wide prices available — the team at Amplify knows that that’s not the right thing to do. That is we condemn such behavior and are looking to be leaders in the crypto-brokerage space by changing the status quo.
Blazing the Trail
As long as traders who use a crypto-brokerage aren’t guaranteed an NBBO, there is a strong chance that they will be trading at a disadvantage in an inefficient market.
Fortunately, that is not something our community at Amplify has to worry about. Since the Amplify Brokerage will have an NBBO-mechanism baked into the platform, Amplify traders buy and sell crypto at the best available prices, and might even benefit from arbitrage scenarios. This makes Amplify one of the only — if not, the only — crypto marketplace(s) to have this mechanism — and as a result, one of the only crypto brokerages whose market can be considered relatively more efficient than the others in the industry.
