186: Sudhu Arumugam – Advancing Crypto Ecosystem—Post Two Decades of Institutional Trading

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What's up everyone? Welcome to the first episode of 2020. Hope you had a nice break and have had a little bit of time to plan for the year ahead. Now joining me on this episode, episode 186, is Sudu Arumagim. He is the co-founder and the chief risk officer of cryptocurrency futures exchange CoinFlex. Though prior to this, Sudu spent near 20 years in various trading roles, mostly dealing in options on indices and single stocks, other exotic derivatives, and some fixed income.

We start things off talking about his early days and his experiences in London's life trading pit. Sudu recalls meeting and trading with DRW founder Don Wilson, who he described as a force to be reckoned with, and this was before his firm became the global powerhouse that it is today. Sudu also speaks about heading a small institutional trading team within Merrill Lynch, which is pretty interesting.

Then in the later part we speak more about crypto and the efforts of CoinFlex to become a market leading exchange. Before we get into it, there is just one thing I'd like to make you aware of in order to be as transparent as possible. So many of you will already know CoinFlex is a sponsor of Chat with Traders and have been for a while now.

But in November, we actually entered into a twelve month sponsorship deal, and as a part of this, to sweeten the deal, I offered to do one episode with one of the CoinFlex team members. So this is that episode, and I think Sudu is a natural fit given his extensive trading background. So with that being said, let's get on with the show. Here is Sudo Arumagum for episode 186.

Starting out, uh, you actually began trading on the floor of the Life Exchange in London. Am I correct there?

That's correct. Yeah. I um I studied at university in London and uh economics and then uh one evening I saw an ad for trainee derivatives traders in the in the F T and knowing very little about it, I applied for it and uh they asked me a bunch of bunch of Matt's questions, uh rapid fire or sort of three sets of interviews and next thing I know I was uh standing in the middle of the life floor one Monday morning. So who was that that which you were working for?

Yeah, so in in the original uh options trading business, there was dominated by independent uh trading businesses. And there were three main ones at the time. Um And they were a firm called O'Connor and Associates, which became Swiss Bank's UBS's derivatives arms.

There was a firm called uh Chicago Research and Trading, which became the derivatives arms of Bank of America. And the third one was the firm that I joined called Cooper Nef and Associates, which became the derivatives arm of uh BNP, Bank Bank National Paribas. Okay. And what were you trading once you um came onto life?

So you start off by being a clerk, uh, like you do on the the Merck or the C M E or the C B O T and I was a clerk on the Guild Option Guilt Futures government bond futures pit. Um And then my first trading role as a junior option trader was in the FTSE hundred index options pit. Okay, so the index. Did they operate in in slightly different ways? I imagine obviously there there'd be different nuances between trading uh bonds and then trading a an equity index.

Yeah, this is one of the kind of interesting c questions and points about uh options tradings. Actually but I would say about eighty percent of options tradings are uniform around irrespective of the product you trade. And that's because they're very you know, it's a very complex um product to trade and handle and risk manage. And so that skill set sits independently of the underlying.

And I would say the other twenty percent or so would be kind of specialist product skills. So So if you swapped between FX, bonds, uh, fixed income and equities, you are you know, you are learning about the new underlying, but your fundamental skill set it's it's uh transportable. Which interestingly is probably the other way around of normal futures trading because if you like yourself are a big equity trader.

You know, and I gave you a f I I would say, Hey Aaron, here's the you know, the list of uh drop down trading connections to the fifty largest government bonds out there, you'd be like, What is it? You know, it makes no sense to me. Whereas an option guy can easily uh uh pollinate across different asset classes.

And what was your experience like when you when you did begin to start trading? Like did you pick it up fairly quickly or how'd you go? Yeah, Kubernetes and and and the other American option houses were very kind of a brutal learning house. Uh they they f you know for every ten tra uh junior trade clerks they hired, they would fire probably six or seven.

And so if you made it through the end of the training programme, it meant that you had the skill set ready to to be uh to to be um badged in effect. And that means to get into the pit alone. And the reason for that was very simple. These were the days before

uh electronic trading in these markets. And so when you kind of wore the your company logo and you went you went into these option pits or futures pits, you could trade any size you wanted because the risk management is so poor from a clearing perspective that

it would be at least a day before anyone would figure out something was wrong. And so these uh houses when you kind of wore their badges and traded need to be sure that you would not um A crack up under pressure and B totally understand the risk that you were putting on. Can you just break that down a little further? Like as you described it, the poor risk management. So the trades weren't wouldn't

uh be logged anywhere until sometimes twenty four hours later. Did I understand that right? Yeah, not quite as that, but let me give you an example of how it works right now, which will help. Um like for example, if you uh trading futures um on a on a platform and you were going through a prime broker, you would be pre trade risk managed. So

you would submit a buy button and somewhere in the system there'll be a check against your credit, your collateral, your limits. And then if all of those gets ticked off, the order gets then put onto the exchange and and if you get filled, you see it in your account. When you're trading on the floor, there's no pre-trade risk because it's open outcry. So a broker walks into the pit, you make him a price.

He he trades with you, he tells you a quantity or you agree a quantity. He has no idea whether you've got the funds in your account or not at that point. And let's say you trade it at seven AM, it will take till about seven PM.

that evening before your trade ticket gets processed into the system. And if there was something wrong, i.e. you'd breach your limits, you'd only find out the next morning when you got your s a a call from your clearer or or you're on your statement saying there's a margin call. So you can imagine the the the time lag between trade to to first alert. You know, it's quite significant. Did you ever have any situations like that where you breached your limits?

Uh there will be situations where the clearer would change the margin parameters and he would say you would have to kind of submit more margin in the morning, but but there was minor tweaks around that, but but nothing more. Nothing too serious.

No. So how long did this go on for? How long were you actually trading on the floor? I was trading on the floor for for about eight years and gradually during that period more and more products were be were going to electronic trading and The options were the very very much the last products to go to to go upstairs because there was a lot of concerns at the point about how easily uh you know options with multiple strikes and multiple months could get transported to an electronic platform.

Eight years. That seems like quite a long time to be trading on the floor. Did you enjoy that experience? I uh I absolutely did. Uh it never even felt like work because you would kind of go there and the buzz of of you know, people surrounding you and shouting with you uh

was incredible. And and as a trader, it was actually the easiest period to to trade because you saw the flow. If you're a trader right now or a market maker in electronic environment, you're kind of sat in your little office watching a screen with the where there's no real indication of flow, uh

direction, size, what the brokers are working, what are people looking to do. Whereas when you were in the pit, everything had to go through that pit. So if you stood there from morning till noon, you would get a really, really good feeling for for what the market was doing.

It was a lot easier to be A profitable, but B to better risk manage your portfolio because you c sort of ha knew a lot of the lurking risks that were around there. Whereas on the electronic world, you know, you're very, very siloed where you are. So in in that case, how did you find the the transition, you know, once you left the floor uh and went to electronic trading on the screen?

So we were really lucky because for option traders, because it was so complex, even though options became uh went onto the screens, for the for a good few years afterwards, like five, six, even to this day maybe, a lot of options trade on the phone. And so it was simulated like the floor where brokers would call you up and ask for your thoughts, prices, views. So you were getting a a a feel for what is going on out there. The markets that were very, very difficult were stocks and futures because

These guys went from huge pits with hundreds of traders to sort of individual point and click. And you would get, you know, particularly the life floor and I've heard very similar stories on this on the Merck and the C B O T where huge profitable traders on the floor went upstairs and basically, you know, lost a bunch of money or could never make money again. And so they would kind of retire or leave the business.

Uh but for option traders the the the kind of longevity of it was was there for for for a much longer period. Okay. So yeah, you didn't really struggle too much with that.

I'm not sure where this fits into the timeline, but I think it's somewhere around about here which you uh became introduced to Don Wilson. Uh and some listeners will know Don Wilson is uh the founder and the man behind DRW, massive uh proprietary trading firm out of Chicago and now has a global presence with like five hundred or so people. Yeah, tell us a little bit about how that came about.

Yeah, so th one of the interesting transitions uh as the years went by on the floor was that Um, as the American market sort of became very, very um uh tight from an arbitrage perspective, some of the bigger American traders. from these US houses started coming to Europe themselves because previous to this period they would sort of train their juniors, send them out, and then kind of stay back in Chicago. One fine day this this American gent turned up in the pit and Set.

uh, hey, I'm Don Wilson of DRW and of course, you know, fifty guys are like looked at him and then carried on chatting amongst ourselves because we've never heard of him and didn't really care, quite frankly. But it soon became apparent that, you know, this guy was a force to be reckoned with and uh

And that was my first introduction as competitors. And then towards the end of the the floor period, uh as I came off it, I I went to actually to work with Don and and we actually became flatmates. He was my boss. And he was if uh growing the um the DRW's European side of the business, which uh which is still hugely, you know, as you said, a huge global business now in Singapore, London and and and and Chicago.

What gave it away that he was a a force to be reckoned with? Uh the s the sort of size uncertainty that he traded with. Whereas we were we were taught to sort of keep it small Go for big edge trades only and kind of recycle. You know, effectively it's sort of an HFT type model, but in the pit, you know, do to do fifty to a hundred small trades, make decent money on every one of them, a few losing trades, and then you kind of go home flat and happy.

Whereas whereas Don was very much the mode of this thing is mispriced and I'm gonna sell it and I'm not gonna buy it back till it's fairly priced. Whereas the way we were trained is that you sell something at you know, if you thought if you thought an option was worth ten

you would sell it at twelve and if someone offered you at eleven, well, you know what, you've made a tick, take it back. Whereas Don is like, why would I pay eleven? It's worth ten. Um, which was a very change of, you know, real mindset change. So in a in a way you were very much a scalpy type of trader.

Yes. E everyone was on the floor because it's the way you were kind of trained, whereas Don was a scalpy round trader but around a massive position. Yeah, okay. Okay. And did that influence your trading style in any way? It did actually, because when we moved upstairs and I went to work for Don, I started to realise that that we were, you know, for for years that we'd left.

you know, edge inverted commas on on the in the pit, you know, and and we you know, that we should have done sort of so much better than we did. Uh But and so you sort of take that skill set away and start start learning about longer term trading, uh which, you know, Don was a and still is, I guess, a master of.

Obviously looking at where Don is today and the presence that DRW has, uh, you did say it was soon apparent after he arrived that uh you know he was a force to be reckoned with. Was there anything which signaled to you or anything special about him that you observed which kind of gave it away that he was on to something much bigger.

Yeah, it's it's it's a great question. It wa it is actually there was one, you know, p one definite character trait done, which was You know, as as sort of floor traders and very intelligent and kind of successive floor traders, you know, we would get to work very early, you know, six in the morning, pits were open at seven AM. Yeah, just as he would do. And by five o'clock the pit would the pits would end and and I think this is the same story even in the US.

You know, by six o'clock you'd be in the pub. You know, you've you've sort of put in a really long day, you're hot, you're sore throated, you know, and and you're ready to to have a beer and go home and chill and start again. Whereas with Don, The thing that gave it away was that, you know, he would at at the close, he would then go upstairs and pour over charts and data for hours on end.

and and back test and and and you know really get down to the nitty-gritty of his whereas, you know, what frustrated him about all these British traders is that, you know, we'll be in the pub below the building. And uh so I guess that was just the the culture at the time. Well I think it was the same c sure, but it was the same culture on the when I used to visit the the C B O T and C M E. I mean they used to finish at four o'clock and were in the in the in the bar local bars by four fifteen. So

It wasn't even a US European thing. It was just a, you know, floor trade uh mentality versus uh someone trying to build a huge business, I would suspect. Yeah, yeah. It's pretty impressive. One day I might be lucky enough to get him on the podcast. Yeah, well you've you've got some of his team on the podcast before, I believe, right? Michael Moransky, I th so Yeah, uh Bobby Cho uh and uh Kim from DRW V C slowly work my way up.

Now one of the interesting things about you is you actually headed up a trading team at Merrill Lynch. I'm not sure if this came directly afterwards, but uh I'd be really keen to sort of uh dig into this a little bit. This this trading team which you were a a part of and which you headed up at Merrill Lynch, uh, was that in London still?

That that was in London, but this was now switching back to the equities world again and particularly uh single stocks trading uh. Okay. And are you talking about trading the actual equities or are you training talking about trading options on the equities?

Options and structured products on the equities, yeah. Okay. So what's uh what's a structured product? Is that just options or yeah, just fancy options that have kind of uh uh funny terms and interesting terms like cliques and knockouts and knock ins and all kinds forwards and uh

Savarian swaps, but but they're they're basically exotic options. So vanilla options and exotic options. Are they OTC products or do they trade on a a a live market? Those ones are all OTC. Okay. So who do you trade those with? Uh mostly uh hedge funds and family offices. Okay. And so why would you trade those uh as opposed to the the options that you can trade on a a screen in the in the live market?

Um the the the counterparty, the clients would like to trade that because they could be more bespoke. Uh if you if you traded l listed options on the floor, they expire on a certain day of a certain month at a certain time. Whereas the OTC structures can be custom built for for anyone.

It's fascinating that sort of stuff because you just I don't know, as a retail punter you just have no idea about how complex these products get, which you've had exposure to. Yeah, I mean, well the here's the funny part. If you don't know where it is, how do you know the the pricing you're getting is correct, right? So this is the, you know.

Having been on the bank side of it, I would never do one of these structures with a bank because it's it's there is no um clarity in where fair value is and where marks are. Whereas at least with listed options, it may not fit your exact time, month or or or day. But at least you know there are multiple players providing multiple prices that you could keep an eye on. You know, so price discovery is is is is uh way way better.

With these uh these OTC uh trades, uh this is probably a bit of a a a newbie question, but Were they more profitable? Like were they they sound like they were there was perhaps a little bit more risk involved, was there also a bit more potential profit and upside? Yeah.

um definitely a lot more profit and upside. Um in terms of risk, the reason why they are more riskier is that because when you do an OTC trade, you're trading let's uh say against a particular family. Now they may be a very wealthy family. But you kind of you know, your credit department kind of does a

due diligence on them, but effectively you're relying on other people to settle the trade. Whereas if you did a less listed trade, if you and I trade against each other, we would still trade, you know, via a central clearing party. It could be the London Clearing House or the or Eurex clearing. So or ASX clearing in Australia. So you knew there was certainty for for delivery and and settlement, whereas with OTC trades, uh, you know, there is that extra risk factor.

Yeah, that's really interesting. Um, but I guess just winding back a little bit um to uh more specifics about the team. Uh, was this a team which already existed when you came into the role or was it something which you put together? It was a team that was o that already existed, but it was a team that was primarily focused on on OTC trading. And the world was moving more towards sort of listed trading because of the certainty on margin. And a lot of the banks were basically

bulking up their teams around listed options traders. Um and so I was part of a bunch of people that was hired by Merrills to to sort of run different books effectively. Okay. And how many people were uh a part of the team which you were overseeing? There was four of us on our team. Uh in total in equity derivatives it must have been about fifty people across the different uh groups. Okay. But they were all sort of siloed groups.

Yeah. I mean you're paid together and you're PNL'd in risk managed together in gr you know, loosely, but but yes. Okay. So um the focus of the team was to get more involved in enlisted uh options. Um, can you talk a bit about the type of the type of strategies which you uh ultimately were trading? Sure, it wasn't very uh dissimilar to the floor to be honest, it was but obviously on a much larger scale. Um

And you would uh it was basically flow trading. So you'd have customers buying and selling different stocks and stock options, and you would try to sort of risk manage and trade against all the all the customers. And so if a customer would come in and a client of Merrills would come and ask for you a a stop in an options trade in in Deutsche Telekom, for example

that you know they were also asking Deutsche Bank and probably also asking Goldman's and so all three of you were kind of race to A make the right price but B also sort of try and win the trade if you can because obviously the bank culture very much was around, you know, keeping your clients happy. Does that not come under the category of OTC still? Uh no, because you were quoting to the climb but the crossing of the trade uh would be would happen on exchange.

So you would you you would know who the customer is and you would trade with them but then both sides of the trade, if you were the buyer, you would enter into the URX system, the seller would enter in the URX system and it would get mashed on Eurex. Okay. Were you ever doing trades where you would post Uh, you know, your orders in the order book which everyone can see.

We we did because b uh banks were going more and more into the kind of automated uh HFT type model for for options. Whereas obviously at that point it was huge in in the underlying stock, but the option side of it was still very much kind of voice and and uh but that world was changing towards HFT. And now of course if you if you look at any option screen or major option screens in the world, they're all H F T based. You know, that they're there's very little voice involved. So

Options have taken, you know, we're ten, fifteen years behind every other product, but they're it's it's a full blown HFT business now, as I understand it. Yeah. So that that that shift, if you will, that kind of came in a little bit after your time. Yes. It started around there and then became much, much more aggressive. So so for example, you know, I I think I was I I met someone the other day who was who had just left Merrills, who was there at the same time as me.

you know, there was I think at the time like I said to you just over fifty people across sort of equity or indices and single stocks and and that same those same roles are done by eight people now as I understand it.

Wow. Okay. Yeah. I guess that that makes sense. That's the way it's all going. Yep. Now was this uh what you'd call proprietary trading at Merrills? No, I would I would say it's called flow trading because Merrills and the banks also had separate propriety desks that wouldn't see the customer trades, who who would just, you know, go long or short because of of of their models or or their kind of view on the market.

And they would be Chinese walled on a different part of the bank. Okay. Okay. So that was entirely separate. Yeah. So you weren't really Yeah, that's interesting, isn't it? I mean, what was the ultimate goal of your team? Was it to generate Uh that's that sounds really silly, but was it to generate as much PNL as possible? It it it is. It's sort of a it's sort of a hard and soft metric. The the you know the hard metric is is PNL, so you've got a budget.

You get customer feedback or the salesman says, you know, you oh, that's really great. The customer's happy. You kind of get this sort of soft. Pat on the back for that as well. So It's it's a it's it's really primarily PNL based, but there was also the, you know, a happy customer is is a good is a is a great trade as well. So Gotcha. What would you say are some of the most uh interesting or perhaps memorable might be a better word?

Uh most memorable moments from from working on the team. Is there anything which jumps to the front of your mind? I I think it was the you know, the the fact that the actual size that would go down on some of these trades and the length of trades. You know, we were we were coming off the sort of

Even the DRW, you know, if you did a one year trade, you would sit there and say, Oh wow, you know, that's a really risky trade. I you know, it's it's one year away. I don't know what to do with it, you know, how how should we handle it? We need to be careful. And then you kind of go to these banks and you start doing five year trades.

When you say a five year trade, can you just break that down? Sure. So these are option expiries and so, you know, customers would come in and ask for you for a for an index option on the footseaves, for example, on our desk or or on the desk next to me and and and they could be, you know, asking for FTSE option quotes five years out from today.

or three years out from today. So these are v extremely long term options that we're trading as as well as the short term ones. Whereas if you come from a market making and prop trading background from these like DRW, you know, you wouldn't even consider getting into some of those trades because of the risk ru oh, you know, kind of that goes with it on the option side. So the customers who are seeking these five year trades

For example, w why are they doing that? Uh, because they're sort of asset managers or fund managers have that or pension funds that have very, very long term liabilities and assets to manage. So they're not looking at, you know, one year or one month, one year trades. They want start with they want to do sort of replication or hedging strategies across their portfolios over over years. So is it would you say it's typically more of a a hedge type of trade, like to protect some of the downside?

Yes, yes it would because it's it's it's uh the sizes are large but the edges are large as well. So if you were a kind of a hedge fund or prop trading hedge fund they wanted you know, who thought for example that the, you know, stock indices were overvalued and was gonna go down, you wouldn't pick a five year trade because you wouldn't get the size and liquidity that you

you would want to get in and out constantly. So you would pick way shorter term trades because, you know, in in in terms of liquidity and volumes, all the volume was in the shorter dated sub one year sector. Maybe a little bit similar to that last question. Were there any key lessons you learned from this point in your trading career?

really was around position management and and uh you s you started to sort of really try, you know, you you get additional skills around trying to manage, you know, a portfolio of short and longer dated. Because when you were on the you know, your mentality as a as a flow trader on the floor particularly and and upstairs was that

you know, you kind of make a training decision. If it doesn't if it goes against you, you can sort of cut it quickly. Well, once you have a three or five year position, you can't even cut it for weeks at a time. you had to become way, way better at long term position management. I don't mean three or five year position management, but although the trades were that long, but you had to know and adjust for the fact that you may not be able to reverse or close this trade for for weeks at a time.

Yeah, so if you had taken on, uh just sticking with the example of the the five year expiry, if you had taken the other side of that trade, uh and you did want to get rid of it at some point, how would you how would you manage that? You would have to manage it sort of piecemeal. Like you would you would start sort of deconstructing that trade into into smaller trades that other hedge funds might might be interested in. So you would ask your sales desk to go out there and say, now

This asset manager bought this trade. Now, can you see if anyone else wants to take the other side of it? Someone wants one part of the structure or not. So you had to be can you had to become very, very creative. So a big part of it was obviously relationship. Relationships were very, very important for this because

Your competitors most likely had the same position as you on the street. So you couldn't go to Goldman's or Deutsche or Barclays or Credit Suisse. You had to kind of because they would have the same thing. So they would just market even further away because they had no interest in putting more on. So you would have to become creative with your sales guys and kind of you know, literally go on road trips to

you know, multiple off European fund officers and start selling the stuff out to them, explaining the structure and telling them, you know, finding out what their needs are and and then structuring it in such a way that it gets you out of your risk.

Yeah. I mean it's a world I know very little about, but um it's certainly fascinating. It it is because you know, look at look at what you trade and and a lot of your viewers trade. I mean, you know, if they want to go from short to long, they're a few clicks away from it. They don't have to get on an aeroplane and go and pitch using PowerPoint.

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Um when did you begin to get an interest in in crypto? Obviously that's what you're deeply involved with today. Uh when did that start to to come into mind? Yeah, so f I'm I'm a very late guy into crypto and or always people you ask right now might say I'm I'm I'm an oldie, but I actually just got into it in in early twenty seventeen because I started reading about how

uh exchange crypto exchanges were coming out with derivatives products. So I wasn't actually that much fascinated by crypto as a as a currency or a a coin, but a more literally how this would play with what I knew, which was futures and options. And uh so I was kind of going around London at the time, looking around um to l to meetups and understanding more about crypto and and that was my first introduction.

Yeah, it's it's interesting because if we look at like, you know, your career and your experience uh with trading, it's been mostly with uh options and derivatives products. You've been doing that for I think about twenty years or so before you actually came across to crypto, so You know, was there was there a part of you which felt as though you had built up so much experience in uh options and derivatives, um, that it was r a really big commitment to turn your attention towards a new market?

Uh it was actually the reverse. I actually thought, you know what, I knew so much about the old market that that I will give give it a six months and see how how I got on, see well and see whether I was actually right about this kind of fascinating emerging asset class and products that have been built on top of it. So it was kind of a quick, you know, let's see how he goes kind of thing and I've been hooked since. Six months has turned into what, two, three years now. Correct.

Um, and so obviously you found yourself at CoinFloor. Uh now if I understand correctly, CoinFloor was Well it's it's now CoinFlex, but when it was CoinFloor was uh pretty much the the London UK version of what CoinFlex is today. Is that is that right? CoinFlex um So my co founder at CoinFlex is Mark Lamb, uh and he was one of the co founders of CoinFloor. So CoinFlex was an effective uh spin off from CoinFloor where where Mark and I

uh spun the business, bought the business out from CoinFloor, spun it out and moved out uh to Asia to launch it. So Coinfloor was a crypto exchange in London though, yeah? They still are, yes. Oh, it's still there. Okay. Yeah.

Okay, gotcha. How come that went down? What was the motive there? Why Why move the business or or take the business to to Asia? Yeah, because it's it's uh it became very clear to us um and the vast majority of crypto taking or retail business comes out of Asia.

everyday, you know so so crypto is a very interesting market in for in terms of makers and takers. And I I don't know if whether you use those terms in traditional space, but w I certainly didn't before I Do it to crypto, but there was sort of the market makers and liquidity providers which tend to be very sort of Western type based businesses. And then you've got the retail side of it who are the takers.

uh aggressors, they are very much Asian retail and and and but the vast majority of futures driver's business comes out on the taking side, comes out of China, Korea, Japan, uh Vietnam, Turkey.

So by moving out to Asia, it meant that we can be close to this customer base that we really didn't know much about because I was coming out of a uh uh the traditional space and so you know that these big firms trading western trading firms out there trade crypto and I you know you could get relationships with them fairly easily.

But we were like sort of scratching your heads thinking, right, how do I get closer to our retail taker base? And to do that we spoke to, you know, some of our shareholders were were crypto guys based out of Asia and they were like, Look, the you know, you guys have to be here because the the the customers need to know that you're committed to to their part of the world. And that's how we ended up here. Had you spent any time in Asia just personally before this before the move?

I had I had done. I I personally love. the you know, travelling around Asia and I lived in Singapore for a while as well in the past, but the majority of my life has been in London, but but but I had flavours of Asia. So I knew from a sort of living perspective it would be very, very simple. But But obviously the whole unknown was the the business side. Yeah. Okay. And the same goes for Mark as well, I presume.

Uh for for Mark was actually the opposite. He had no experience of Asia from a living perspective. He was very much kind of the a Californian, Boston and Londoner based. Ah, okay. Okay, cool. Um and you touched on uh investors

Uh, just before and that's actually one of the things I found uh really fascinating about CoinFlex is that the high profile investors which you did have on board One of those being uh TT or trading technologies, how did that relationship come about? Because it's very interesting, like trading technologies is a software company and they're kinda pioneers in their space, especially in the the futures and options world.

And I know they've been getting more and more into crypto by offering it through their platform, et cetera. How come it made sense for them to actually become a a a partner of Coinflex? Yeah, so fr I think from their perspective, they were, you know, they are, as you say, the largest fixed income ISV or software vendor in the world. I think I read somewhere that a trillion dollars of of uh fixed income flow, uh futures flow goes through that.

their infrastructure on a daily basis. And they're a market leader. So they were looking for a way to sort of differentiate and add to their sort of product offerings. And they were started investigating crypto, kind of unknown to us. At the same time, uh, we were looking at uh launching this exchange and what we knew we were good at was uh uh the matching engine, the margining, the the kind of operations and the whole

Exchange running business, what uh what we knew we weren't good at was at front ends. And, you know, like a lot of crypto exchanges, um The front end has just got, you know, you you log into your system and it's got a big fat buy and sell button, a graph and not a lot l not a lot else. And so we were looking for a software partner there.

could fill the fill that space with multiple order types, exciting stuff and you know, ladders and brackets and all kinds of different ways of managing risk and trading and and uh we started having a conversation with T T and and soon become became apparent that you know we were gonna be great partners because we've kind of both ticked what the other wanted to do um or or wanted to have. And that's how the Parnashi was born.

Yeah, I think that's really cool that you have linked up with T T and, you know, in my eyes it it added a lot of credibility to CoinFlex as well when I was, you know, beginning to have those early conversations with with Mark about uh potential sponsorship and that sort of thing.

Yeah. Tell me a little bit about the feedback that you've had and the the response from the T T interface because I I understand that it might not have been received quite as it was intended to, because, you know, you bring in crypto traders who are used to

you know, the sort of um interface that you see on any kind of crypto exchange, like they all look very similar and then I guess if someone comes across the CoinFlex and they use the T T interface they're not really as familiar with how that all works and some of the features that are available.

No, no, exactly. It was it was a very, very interesting sort of baptism of fire because we went live, we turned on we were so excited, we turned on the T T screens, there it was, our white label, you know, you and

Of course in our first few customers, uh manual customers who who uh looked at it, they were like, Well, what the hell is this? We have no idea how to use this. So we're like, oh no, well, you know, we'll teach you, here's a ladder. They're like, Well, we don't want a ladder, where's the buy-sell button? You know, and uh so they so we were like, Okay, so we went from this sort of Rasmus launch to now panicking to thinking, look, how do we um A simplify the T T product but B educate people?

What we've done c uh in a subsequent to that is that we we have effectively uh created our own UI which sits along T T but And it's uh a crypto native UI. So it looks very similar to to every other exchange, as you say. Um and what's good about it is that you start trading on that sort of simplified platform and then the whole time we're sort of tre teaching you through videos and

and and uh blog posts about all the things that you could do on the TT uh uh interface. And and then as these guys sort of trade more, we graduate them across to the to the TT ladders and and and of all the functionalities that they have. And so that more recently, you know, with the launch of our uh native app as well, it's worked out really, really well because you have this segment of crypto traders who

trade a couple of times a week who will who are very, very happy with the crypto native UI. And then you've got these daily uh scalpers and high frequency retail traders who are like, this is the best thing we've seen since si sliced bread.

with regards to T T. Yeah, so I think it's worthwhile me asking you like Why should someone who's an active crypto trader uh consider using the the T T interface as a spok as opposed to the you know the the interface that you see on every other exchange? Yeah, no, it's a great question. Um

I can tell you something around one particular order type that we're sort of doing a lot of fun and competitions and trading games around and we've called it the bracket competitions. And it's a it's a T T term. It's a and I if you're If you're an individual trader right now, you would uh and your mental processes you wanna buy buy, I don't know, Bitcoin here and then in your mind you would have uh a take profit level. Where if if you said he went there I would definitely sell it.

And you would have a stop loss level where you said, you know what, if it goes there I'm gonna cut this position. Well T T bracket orders. Does both in one go. And the beauty about it is that you have to define the take profit and the stop before you enter the order. And so what it does is that it teaches you to do really, really good risk managed trades. And no one's telling you where to put your stops or take.

your profits. But the point is you have to define it, which takes emotion away from the trade. And so we discovered T T brackets because we were playing around it with ourselves and thought, Oh wow, this is the most disciplined way to trade. And so what it does is that we educate crypto traders who trade occasionally. or who are nervous about crypto because of the volatility of it, and we take them from that zone to a safe zone where they could actually put trades on and

and risk manage it from a from a loss and profit perspective. And and these are called T T brackets and we've actually started a whole series of competitions which start in the next few weeks.

uh around bracket competitions and it's basically around ROI and volume and trading brackets and and you know and it's a way of basically educating customers onto the platform to say look, you know, crypto futures trading are not dangerous as long as you're disciplined and and your you you set your your levels up front.

Okay. And I'm curious to know a little bit more about these competitions, but just before we do that, um one of the cool things with the the T T interface is that you can trade uh as you mentioned a little bit earlier, directly by clicking on the ladder or the Uh, you know, clicking on the price levels. Uh I think ladder is a is a T T term. That's something you can't do on other crypto exchanges, right?

Yes, because you've got you've well crypto ex th there's some exchanges who are coming out who I think have c who may have copied the T T ladder because they know how popular it is and then there's one in in in in testing right now. But essentially the vast majority or almost all don't have ladders. And and what's good about ladders is that um It's point and click. So you set your default sizes.

you can see where in the order book there are gaps. So you can place your orders there or you can directly aggress and just take lift offers. And you can cancel working orders and move working orders by just dragging your mouse around the order. So you wanna move it down three ticks. You don't have to cancel your order like you do on any other exchange and re enter it again.

Here you just sort of you click highlight it and you just drag it down on the ladder itself. So it's it's very, very fast, very easy to use and once you get used to the sort of you know, dealing with it. Uh what's interesting is that I spoke to a couple of our high frequency retail traders recently and they don't even have buy-sell buttons on their pla on their uh uh GUI anymore. They've just sort of

deleted it out. So all they have is a huge graph, fills, and a massive ladder in the middle. Yeah, I think once you actually like gave it a try and got used to it, I don't think you'd ever go back. No, no. I think you're right.

So yeah, you mentioned these competitions. How do they work? And what's the how come you're doing these competitions as well? You know, the crypto markets have been in a bear market and so right now you'll if you go to a lot of exchanges you'll see sort of

crypto trading competitions. Now these these these sort of trading competitions are are popular and and when we were launching we were kind of watching these, but they're all very much sort of you know, ROI based and and and so effectively it would just incentivize you to you know, move some Bitcoin in or or b Bitcoin Cash or Ethereum and

and take out as much leverage as possible and just go for it. Well in crypto terms, YOLO it. You know, and uh and what we d wanted to do was sort of encourage trading but but around brackets. And of course if you keep going round and telling people Hey, have a look at this bracket tool. They were like, listen, we've got no interest. We're playing, you know, in the middle of some competitions. So we thought, you know what, let's create our own competitions around brackets and so

It sort of served two purposes. One was it helps us get customers interested in looking at us, but it also helped us educating people as the safest way to trade. Yeah, it's funny, I was like I was talking to one of my mates the other day about uh these crypto exchanges and CoinFlex obviously being one of them. uh that that run these competitions and they're giving away uh it's tether in is the prize, correct?

On iExchange, but it could be anything, yes, it could be any other crypto as well. And I was like, you know, you don't really see like uh Nasdaq or NISE or these types of exchanges or CME doing it. But then I kind of thought about it a little bit more and it's it's not too uh different from how, you know, some of these big exchanges offer rebates to large market makers, is it?

It it's not but here's the thing Aaron, here's the thing about crypto that I find fascinating. So the reason why Nasdaq or ICE don't run competitions is that they don't face the customer. So if your eyes, you're facing a bunch of big brokers that have to come to you anyway. So now if you looked at those brokers, for them, the the customers customer effectively, for those guys to get their customers, they will be offering, they would offer all kinds of things like you know.

put you know if you look at the CFT market in the UK or if you know I don't know fifty quid free bet. You know, put fifty quid in we'll match it for another fifty quid for your first new account, you know, and s you know little things like that. Whereas in crypto the beauty about it is that

customers can choose where they trade and they come on directly. Um and the number of benefits that come with that. It means that, you know, if I don't know if you ever, you know, it's great exercise for you, try and trade carbon futures on a yeah on a I don't know an IG or an IB or one of the big things, you know, you'll it'll take you several days even to get an account, if if at all.

Whereas with crypto, you're gonna be up and running within minutes or y you know, on on these exchanges and and you can try you can try trading with ten dollars. You can try trading the fifty dollars. You don't have to put five thousand bucks in. And uh and so for us, you know, because we're facing the retail customers directly. you know, we're the ones running the comp competition as an exchange, as as opposed to the the brokers in in the traditional space.

And and the prizes that you're giving away are you know, the the sums of money uh is is nothing to laugh at. Y you've got some big comp coming up shortly, don't you? It's like you're giving away million dollars in tether or

We do, yeah. So we've got a a bunch of uh weekly competitions which will start running in the next few weeks. And those are sort of uh lead lead ups to this other one that you mentioned and and these are basically, you know, sort of a hundred thousand dollars prize money during the week.

type competitions, very short ones, you know, based around a couple of hours of bracket trading and and uh um su such. And then that leads up to uh what we this the million dollar team competition that we'll be we'll planning and running. And and that those details are uh being worked on right now. They will come out in in full shortly. And uh yeah, it's it's basically a multi-team, you know, thousands of trader type format where where the total price money will be will be a million bucks.

Now one of the big points of difference of CoinFlex uh versus other crypto exchanges is that you're a futures exchange and those futures are physically delivered. Can you just break it down in simple terms why that actually matters?

Absolutely. So if um if we use the the kind of traditional crypto futures product right now, these are perpetuals. And perpetuals means uh they are contracts that never expire, they just keep trading. And Uh because they kind of move around, they have to be referenced to something.

You know, how does a you know uh a perpetual gets referenced priced? Well, it refers to sort of these external spot exchanges. There could be one, it could be five, um uh or more. And so Uh these spot exchanges that these perpetual reference uh could be, you know, at any particular time, could we have a very thin order book.

And so a big whale, the crypto term, whale meaning a uh um a a huge crypto holder, could come into one of these spot markets, put on a leverage play in the futures market to benefit from it, and then manipulate the market down or up. And so perpetuals are have two big issues. One is huge manipulation risk. And the second thing is to keep these perpetuals in line with the underlying index, they use sort of hourly or eight hourly or four hourly interest rate.

So that if if the if this uh perpetual is above the fair value, they'll charge longs a bunch of interest rates and and to bring the discourage buying to bring the futures back down to uh fair value. And so you've got this huge two huge forces working there the whole time, which which are not very attractive in our view. One is this constant risk of manipulation, and the other one is not knowing any certainty of um what the your funding costs are.

And I can give you examples, like for example, uh on the funding cost right now, uh you could uh pay, you know, maybe pay even thirty percent a year in funding charges. So you could be long Bitcoin and Bitcoin moves thirty percent and you've made no money.

Which is just pretty horrific. And on on the on the manipulation charge, you know, uh uh uh angle There's been several in incidences this year as well where uh a spot market has been moved by one kind of smallish order and that's moved a futures market which has got uh billions quoted on it and creating a bunch of liquidation. So we've seen you know, seeing this time and time again. And so when we were designing the um

the our futures product, we went straight off the kind of traditional space where in the traditional space is physical futures. And and why do physical futures matter? Well they matter because they deliver into a spot contract. So if someone manipulates the futures contract and you hold the underlying spot, you don't have to do anything about it because you will just be fine for delivery. And y and you know if you look at the traditional space where there are futures on

sorry, physical futures and cash settled futures for the same type of instrument. The futures the cash the the physical futures owns, you know, ninety percent of the volume and open interest because of this certainty that Sings uh uh that sits in the background around manipulation or or or the minimization of of manipulation to be more accurate. I if someone wants to read up on this a little more, I presume there's info about it on the the CoinFlex website.

There is and we've got blog posts around it and and and stuff and and you know, I guess the proof is in the pudding, I mean, of the of the new Western exchanges that have come on They're they're all physical. Uh if you look at BACT, if you look at Aeros X, you know, they're they're all physical futures. And so we were the first physically delivered futures exchanges in the world and and uh and we've got some big names coming in behind us in in in ice.

Okay. Okay, cool. Well I'll dig up a link to uh these these blog posts and I'll make sure they're in the show notes. Uh easy to find if anyone wants to check that out. Awesome.

Uh now, besides being co founder of CoinFlex, you're also the risk officer there. So being a risk officer of an exchange What are the things which you monitor? Like what's most important that you have your eye on? It's really two things, margins of customers uh and liquidity on the order book.

Talk to me more about liquidity on the order book. Sure. So because we have physical futures and we don't reference external indices, we kind of reference, you know, liquidations and and other trades happen within our order book. Um And one of the big differences between ourselves and traditional uh crypto exchanges rather than traditional uh uh traditional exchanges on the crypto side

One of the big things we did at the start was not be a market maker, our own book, because we do not we do not want to be either be seen as a single dealer platform, like some exchanges masquerade around right now, and almost certainly we do not want to trade against our own customers. So

We um, you know, got a you know, been going out and we spent a lot of money on a liquidity program. And so one of our main main roles in the risk department is to make sure there's sufficient liquidity on all our different instruments to make sure that if there is a customer liquidation that It could be handled in an orderly manner.

So okay, so those are the two things which you're continually monitoring. Yep. Let's do one last question and then we'll probably close things out. What do we got here? Let me just quickly skim over my notes.

Hey, let me ask you this question just as a little bit of fun. If you were to return to trading today, how would you intend on trading crypto? Like where would you begin to look? What types of things would you be researching? I think it's I think the the still the very fascinating model in crypto is is the inter it's old fashioned arbitrage. Because if although Bitcoin takes sort of

ten minutes to thirty minutes to an hour to kind of be able to move between exchanges, it there is still a lot of friction in moving collateral between exchanges. And so there is still a lot of inter exchange ops that go on around the same same sort of products and so the the The real chall challenge here and then obviously a lot of HFT firms from the traditional space are now swarming over to crypto because of this.

There is still decent RBs to be made for traders between, say, you know, a BTC product in in uh futures in one market versus another and managing those risks. I always ask my guests at the end, uh, just the best place to fly them, but I know you're on LinkedIn. Um, are you on Twitter? I am on Twitter. I'm not an active user. Um but the CoinFlex handle is um at CoinFlex.com all in words. Yeah, that's important. Don't go dot com. It's D O T C O M. Correct. Okay.

And of course, you can find out more info about CoinFlex. Use my link, which I've been set up with as part of the sponsorship, coinflex.com slash chat. Um, if you l use that link, uh you actually save on fees. All right, I think we'll call it a wrap there. Absolute pleasure having you on. Thank you so much for agreeing to do the podcast. Thank you for having us, uh. You've reached the end of this episode of Chat with Traders, but rest assured there are more episodes. soon.

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