Congratulations IEX, Now Comes the Hard Part
As the FT reported, IEX’s auction processes were approved, so they are on-track to commence listings in October. That means that we will all start to learn if moral suasion, rhetoric about their “lynchpin” speedbump, and popular appeal will translate into deep liquidity books and trustworthy auction prices in the fall. But, for today, “congratulations on this milestone” is all I want to say.
Cryptocurrency markets continue to evolve
Two recent articles point out that the evolution of the cryptocurrency markets is happening at a rapid pace. First, in the spirit of “follow the money”, an article titled “Hedge Funds Investing in Cryptocurrencies ‘Exploding’ – 62 in Pipeline“ reports that institutional demand for cryptocurrency exposure is soaring. The combination of a market setting all-time highs, true believers, and a primitive market structure that seems exploitable to “smart money” is a heady cocktail for growth. The good news is that there are positive developments about the state of the market.
In an excellent OpEd, Kayla Matthews explains how trading “Bots” are evolving alongside bitcoin and other crypto currency markets. Her point is that the technology is an excellent starting point for trading those markets, BUT knowledge of the intricacies of both market structure and the bots themselves are essential for investors to profit. She also makes a subtle, but critical point about the positive impact of such automation by pointing out that arbitrage trading will contribute to improving the market, by helping some of the current inefficiencies disappear over time. This point bears repeating, because as part of the HFT debate, there have been many pundits who either ignore or downplay the value of arbitrage.
In markets where automated arbitrage strategies are deployed, prices become more “real” since they are kept in line with either explicitly related or correlated assets. The net effect is that such assets become “safer” to trade for the average investor. The most extreme example was the first few minutes of ETF trading on August 24, 2015, when the S&P futures trading was halted. During that brief time-period, arbitrageurs that depended on the futures market were sidelined, with predictable, if disastrous, results. ETFs traded at steep discounts to their NAVs (net asset values) inflicting massive losses on the uniformed investors that traded them (and gargantuan profits to those market makers able to take advantage of the miss-pricing). The lesson from that day is that, despite criticism, arbitrage has significant social value and is vital to the modern market ecosystem.
For Bitcoin, Ethereum and their brethren, the evolution of arbitrage is, therefore, a positive development. For those markets to truly “grow up” however, there is a need for the exchanges and the trading systems that place orders on behalf of investors to evolve as well.