Ever heard of programmatic trading?
That functionally important — or risky, depending on who you’re asking — function of marketing making has made significant headway into cryptocurrency markets. Crypto market maker GSR, led by CEO Cristian Gil took a few minutes out of its trading day to share the latest on programmatic trading and this market’s fragmentation and robustness.
Could you share some information on your background?
After a successful career in energy trading at Goldman Sachs, I spent almost five years outside of the financial world pursuing other interests. One of those was bitcoin, which I began following and trading as a hobby. Then in 2013, via the Goldman network, I was approached with an opportunity to become involved in the space more formally, by way of creating a company to serve as a primary XRP market maker on Ripple’s Consensus Ledger.
Along with two co-founders who had strong tech and finance backgrounds, we developed a business plan and started one of the first institutional, pure crypto market makers. Within a few months, we were streaming prices electronically 24/7 on the few exchanges that existed back then. Over time, as we grew with the market, we offered market making to other clients and exchanges in addition to other services.
Fast forward to today, we have almost 40 employees across three continents, and we are one of the most active traders in the space. Our edge has always been our focus on investing in both technology and human capital – and the fact that we have a long-term outlook. I always believed that the space needed to evolve and become more institutional, and we want GSR to be a legacy business that will still be around in 20 years. With that goal in mind, we have made every effort to invest in what we think the future will look like.
What is programmatic trading and why is it important?
It is generally important to improve trading via technology, and this is particularly true for digital assets, given the tendency for their liquidity to be more fragmented and less robust than that of traditional financial assets. Programmatic trading involves the creation of a set of rules for which a future pattern of trades will automatically follow.
For example, for someone looking to enter or exit a large amount of trading volume, the default is for them to click away manually on one liquidity venue, or perhaps two. Programmatic trading, however, uses computer algorithms as a means to execute, bypassing the need for manual processes, fostering significant efficiency gains in both time and money.
How does market making work in digital assets?
Market making in digital assets works in principle the same way as traditional asset classes. There are various forms it can take, from voice trading to electronic trading on exchanges.
The general idea is that the market maker shows a price to buy or sell an asset, enabling other participants to enter or exit the market more easily. However, compared with traditional asset classes, digital assets are more volatile, less transparent, and the trading venues are less mature, so it requires more expertise to operate in the space securely and effectively.
What is your market?
GSR has the privilege of working with a variety of client sectors with differing crypto-financial needs, from miners, exchanges, ICOs, family offices, high-net-worth individuals, charities, and other institutions.
We make markets on a range of digital assets, both on behalf of exchanges and issuers, as well as for our proprietary accounts.
What relationships between prices and volumes do you see?
The broadest market relationships driving volumes are price and volatility. There is usually a positive correlation between prices and volumes (i.e., the bigger the asset, the greater the volume traded). Volatility of prices is also usually positively correlated with volume: When an asset is making big moves, it typically trades with higher volume, particularly when it breaks out of its trading range.
These relationships are consistent for most assets, but are more extreme for digital assets. For example, when it comes to real estate, there are usually clear ways to ascertain the value of a property. However, for a cryptocurrency, there is an existential self-fulfilling prophecy.
If few people believe there is value, there will be no reason to trade it. If, however, one day in the future most of the world agreed that the cryptocurrency holds value, then volume would be considerable, as the asset could be used as a means of global exchange. Given the unique nature and global scale of crypto, price and volume are likely to continue to be highly correlated for the next few years while the rest of the world works to make a decision.