Our investment in Crossover Markets —the first Digital Asset ECN
Illuminate Financial is pleased to partner with Crossover Markets by co-leading its oversubscribed $12 million Series A round alongside DRW Ventures, with participation from existing investors which include Flow Traders, Laser Digital, Two Sigma, and Wintermute.
The core of our Digital Assets thesis has been around the institutionalization of digital assets over time. We have invested in numerous pieces of institutional grade capital markets technology for digital assets, but a trading venue for trading has clearly been missing in our portfolio. Historically most Digital Asset venues catered to retail traders who have different needs and requirements than institutional or professional traders. However, given recent global trends, the demand for venues suitable for institutional traders is growing, making this an opportune time for Crossover Markets.
Green shoots in the US digital assets landscape
While there is growing regulatory clarity in the form of MICA in Europe and crypto friendly regulators in the Bahamas and UAE, we view the US market as a bellwether given the size and importance of its capital markets ecosystem.
Within the US, the Bitcoin ETF launched in January 2024 and ushered in roughly $30B net flows into ETFs with over 600 financial institutions participating, including Millennium Management, Morgan Stanley, JPMorgan, Wells Fargo, UBS, BNP Paribas, and RBC.
In the last month, the Eth ETF has been approved and expected to go live in July. The FDIC Chair responsible for consistent de-banking efforts against crypto firms, commonly known as Operation Choke Point 2.0, has been ousted. The “FIT21” market structure bill was approved by the US House with bi-partisan support. While ultimately vetoed, SAB121, which has kept banks from custodying crypto, was overturned by bi-partisan support in the senate. Finally, the SEC dropped their probe into Ethereum and its core developers. With all of these movements just during this month of June, regulatory tides are finally beginning to change in the US.
Crypto exchanges were fit-for-purpose but not going forward
The major Crypto exchanges were built for retail and a fledgling ecosystem. This resulted in interesting architecture choices, with early movers combining custody and execution under the same roof due to the lack of available partners to handle these functions separately. Similarly, exchanges run their servers in the cloud which is multiple orders of magnitude slower than co-located servers. Simultaneously, the venues charge astronomical fees due to the lack of competition and price sensitivity on the fees from retail investors. If you are targeting 100x on your investment, buy and hold retail is more concerned about not buying fast enough rather than the 0.6% trading fee. For early adopters, the ease of purchase trumped everything, particularly fees, latency, and governance structure.
But we aren’t in that market anymore.
Fees, latency, and governance structure are of critical importance today. FTX demonstrated the risk of having trading, custody and execution under the same roof. Outside of buy and hold investors, fees add up quickly, and latency is crucial to getting the execution that traders want. The market is moving away (albeit slowly) from the incumbent venues, and towards venues like…
Introducing Crossover Markets — the premier digital asset ECN
Crossover Markets is the developer of CrossX, a spot digital assets Electronic Communications Network (ECN). An ECN is an execution only venue which means that it at no point custodies your assets, instead it coordinates Quotes and Orders from Makers and Takers and works with a third party (Prime Brokers, CCPs, or others) to coordinate custody, settlement, and credit limits. In a central limit order book (CLOB), “toxic traders” can make it riskier for market makers driving wider spreads for all participants. ECNs are different from execution-only CLOBs because of their matching engine. ECNs separate the takers so that makers can manage risk at a more granular level, separating toxic flows from benign flows and in turn giving benign flows tighter spreads than they would get from CLOBs. If flows are too toxic, makers have the advantage being able to opt out entirely.
CrossX has seen impressive traction and growth in volumes with Q1 closing with over $3.1B in volume across 400k+ trades and 141 Billion quotes. With 99% of trades matching under 10 microseconds, CrossX is the fasting matching engine in Crypto. They have leveraged this for partnerships with T1 crypto institutions including Hidden Road, Bakkt, and Talos. CrossX and Crossover Markets have stood out to us for a several reasons -theECN structure, performance of the technology, and an incredible team.
ECNs are more efficient than traditional OTC
ECNs and traditional OTC are both bi-lateral trades without an intermediary, offering privacy to the participants. In the FX markets, ECNs have pulled volume away primarily from OTC markets, as both involve bi-lateral trading vs the many-to-many structure of an exchange. ECNs have a few primary advantages over OTC. For Takers are better able to compare pricing across makers and able to trade algorithmically through APIs. By moving the trades to a fully digital medium, ECNs facilitate 24/7/365 trading better than traditional OTC by removing human communication as a bottleneck.
Latency and quotes per second matter
While low latency is a bragging right, it also a highly practical impact for all takers (and not just those that have high frequency trading strategies). The longer the latency the wider the spreads, since the maker takes more risk from not being able to update the spreads as markets move. Inversely, lower latency allows for faster updating of quotes by makers and tighter spreads for takers. When all in costs of trades are what really matter to takers, having tighter spreads than your competition means less fee pressure for your platform.
Of course, high frequency trading thrives in a low latency environment. This allows them to arbitrage price discrepancies across CLOBs before they can update. For the ecosystem this is helpful for maintaining similar prices across venues and profitable for the HFTs that do the trades. Simultaneously this pulls liquidity from the venues towards the ECNs since the taker volume attracts makers and helps bootstraps the ecosystem.
A fit for purpose team
While all the above is incredibly important, it comes down to the right team being able to execute on the opportunity. Crossover Markets is led by a highly capable leadership team of Brandon Mulvihill, Anthony Mazzarese and Vladislav Rysin. Brandon and Anthony have over a decade of working together in the Tradfi FX space across FXCM and Jefferies’ FX Prime Brokerage. Vlad is truly a one-of-a-kind engineer when it comes to building low latency ECNs. His last ECN, Fastmatch, remains one of the highest performing ECNs in FX and he is now taking his experience to create an even better ECN in CrossX.
We have utmost confidence in Brandon and the crossover team. We have known Brandon since his days at Jefferies and have had the privilege of watching him build Crossover Markets. It’s clear the team consistently executes against their commitments. That is only possible with a fit-for-purpose team like this.
If you would like to connect with the Crossover Markets team, or if you are building a next-generation enterprise technology solution and believe we could be of any help, feel free to reach out to Charlton Hook ch@illuminatefinancial.com.
If you are interested in learning more about our digital assets thesis and a select group of our portfolio click on any one of the following links: Curv, Kiln, Foredefi, Pontoro, and Notabene.
