Institutionalization In Crypto Exchanges: The Ability To Attract Serious Investors And What It Takes To Be Successful

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R.E-tail investors continue to bet on crypto through the second half of this year, and institutional investors are taking note of the rapid rise of numerous cryptocurrencies – from Bitcoin and Ethereum to Litecoin and Chainlink, among thousands of others. Cryptocurrencies are already increasingly recognized as a payment method, with companies such as Microsoft, PayPal and Overstock accepting Bitcoin, among others. As crypto adoption increases worldwide, even with intense volatility and heightened regulatory scrutiny, it is imperative that crypto exchanges prepare for institutionalization, the involvement of banks, brokerage traders, payment providers and the like in order to maintain market integrity and flexible scaling ensure with the increasing demand.

To further advance institutionalization, global crypto exchanges can leverage Nasdaq’s marketplace expertise and power more than 130 of the world’s market infrastructure organizations, including exchanges, clearing houses, central securities depositories and regulators, in over 50 countries with end-to-end technology solutions . With reliable and scalable technology and infrastructure that meet current and future regulatory frameworks, crypto exchanges can grow and attract serious investors while ensuring a trustworthy marketplace experience for all participants.

Technological infrastructure

One of the main differences between crypto and stock exchanges is that the crypto market never stops – it is open for trading 24 hours a day, seven days a week. As more and more investors flock to the crypto market, increasing trading activity and leveraging trading technologies that are suitable for handling the large volume of orders is critical to the foundation and success of any exchange infrastructure.

Several crypto exchanges have taken advantage of Nasdaq’s technology, which provides marketplaces and execution venues of all sizes with reliable, comprehensive, multi-asset capabilities to keep pace with ever-changing market demands. Nasdaq trading technology is suitable for both retail-oriented markets and markets designed for low-latency, high-frequency trading models. For example, Bitstamp implemented Nasdaq’s technology in 2020, Find that the upgrade “caused a significant change in the capacity to complete a large number of trades in a short period of time”. In fact, there was a “decrease in the autocorrelation of 6-second returns between two monthly windows that occurred before / after the update,” suggesting an improved ability of market participants to adjust prices quickly.

Evolving regulation

Currently, most of the crypto exchanges are unregulated; However, crypto continues to be a focus for global regulators. The US Securities and Exchange Commission investigates the industry closely to protect private investors and fight financial crime. In mid-May, SEC chairman Gary Gensler, called that he would like more regulation around crypto exchanges and explicitly emphasize those who only trade Bitcoin and currently do not have to register with the regulatory authority. Gensler also stated during the annual conference of the financial industry regulator that the investing public would benefit from more investor protection on the crypto exchanges.

More recently, Gensler, who views many of the tokens as securities, has called that the regulator encourages trading platforms to have an “open discussion” with the SEC about investor protection in the crypto space.

As the SEC and other global regulators investigate this area, crypto exchanges can take proactive steps to curb tampering in the market by using technology to protect retail investors and encouraging institutional investors to enter the crypto market for the benefit of one to offer a safer trading venue.

If exchanges in this area and their participants want this market to be successful, they have to take it into their own hands to ensure fairness, transparency and market integrity.

To further improve transparency and integrity with its crypto clients, Nasdaq develops and offers surveillance technology. Currently, the three most important behaviors to monitor in the crypto market are:

  • Laundry trade: When a trader excessively buys and sells securities to introduce misleading information into the market and generate incorrect volumes. Often focuses on instruments that are less traded or by smaller trading platforms that want to attract attention.
  • Layer and spoofing: When a trader places orders to give a misleading indication of supply and demand with no intention of trading.
  • Pumping and emptying: When a trader tries to raise the price through buying activity or misleading information. Usually the trader has an existing position that he sells at a higher price.

Given these vulnerabilities, implementing surveillance technology is critical to building trust in the crypto space. There is much evidence from traditional financial markets that crypto exchanges can consider for a smoother path to institutionalization, creating safe opportunities for both private and institutional investors.

The crypto exchanges and participants who implement the same sophisticated surveillance processes and technologies that have long been used by the existing exchanges in the capital markets to maintain fairness, transparency and market integrity are likely to be able to instill public trust and emerge as market leaders .


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