What Will Crypto’s Market Structure Look Like?

a mind meld from like three thousand miles away. I'm not that arrogant that I would have assumed that you had actually read my tweet, given that I think I tweeted it at like midnight your time in New York. I do miss a lot of your tweets because we're

on such a different time zones. But for those who are listening and don't know the context behind it, it was a very interesting story in the crypto world this week where a major exchange, major crypto exchange called ben Aunts, they delisted a coin, causing the price of that coin to fall, and it raises all kinds of questions about who really holds power in the crypto world and questions about decentralization and centralized because how decentralized can any anything be?

If one exchange can come along and say no, we're not trading you anymore, and then the price plummets. Anyway, Tracy tweeted about this conundrum. I had written about it in a newsletter, and I swear I didn't. I hadn't seen Tracy's tweet, but she called me out for stealing her ideas. No, I didn't call you out. I complimented

you on having the exact same idea as me. No. Look, I think the reason why I was actually thinking about it was because it reminded me of an old Odd Thoughts episode, And I think it was actually the episode where you were talking about your experience inventing a cryptocurrency and what you learned from that whole uh saga, I guess.

And one of the things that you pointed out then was you thought one of the reasons that the cryptocurrency didn't actually take off was because it didn't get picked up by any major exchanges, and without exchange participation, you couldn't have pricing transparency and no one could really get on board with it. So over and over and over again, I think we've really seen the importance of exchanges when

it comes to crypto. For what is worth. My cryptocurrency that I started with a friend several years ago failed for many more reasons. Uh that just that many more, including the fact that we never really took the project that seriously to begin with, and it was kind of a joke. Nonetheless, that was one of numerous issues that

we faced anyway, the power of exchanges. It just one of obviously many interesting questions that arise in market structure, and we've been talking a lot about market structure on the show recently. We recently did one about bond market structure. Obviously, crypto market structure just like crypto itself in its very early days. Nonetheless, people are trying to figure out what

it's going to look like. So I think this should be an interesting conversation today because we are going to be talking to someone in that field who's trying to figure out and maybe we'll learn something about where the structure, how market structure works today and then ultimately where it's going in this space. All Right, I'm intrigued. Who do we have today? We're going to be talking to Alex Gordon Brander. He's the founder of Omega one. He's formerly

of Bridgewater. He's building a dark pool for crypto. So, Alex, thank you very much for joining us, Good morning, thanks for having me here today. What is Omega one and how did you decide to launch it or what did you see as the opportunity So Omega one, our first offering is Omega Dock, which is a regulated institutional dock

pool for digital as steps. So let me just break that down digital ass sets, meaning initially crypto and bitcoin, but we also have our eye on the future where we see stock spawns, real estate and currencies all moving

over into this digital environment. Dark pool we can talk a bit more about for your listeners that don't know, but as a particular kind of market microstructure or trading venue that allows large orders to be placed in volatile markets without moving the markets and brings stability to market places and then regulated obviously we'll talk about what that means.

So how did I come about doing this? So when I was at Bridgewater, I had the job of figuring out how to build a next generation trading platform that allowed very very large volumes of f X to get traded in a way they didn't push the market around. When I started first really getting deep into crypto in and made small, little trades of a few thousand dollars

on exchanges. I was shocked to see the same kind of behavior that I was seeing when we were moving around billions of dollars in FX and allies that the market microstructures in crypto needed a lot of help to be able to build the kind of liquidity that was required to then have this sort of flow of money from the old world into the new. So that that's

what got me going. So, Alex, can you talk to us a little bit more about why the crypto market in its current existence or its current form is actually a liquid because we hear all these stories about, you know, even small trades having an outsized impact on the market, But we also hear a lot about bitcoin whales, people with big positions or who make big trades who are able to really really move the market. Why is does

this seem to be such a problem in crypto? So I think there's probably three different causes root causes behind that.

One is simply immaturity that you know, markets are ecosystems, and if you leave the ecosystem for a while, different kinds of sort of herbivores and carnivores and different kinds of beasts enter the ecosystem and end up creating this sort of efficient landscape of trading, and in crypto, they just hasn't been that long for you know, the agency brokers and market makers and OTC desk and all these to really develop the tight web of inter relationships that

they have in other markets. So there's a there's an immaturity piece. There's also, i think a more interesting thing, which is crypto as a market that started off in the retail world, and most of all the other asset classes that we know started institutional and moved retail, and this thing started retail and at a time when there's a really low barrier to entry for creating exchanges and

platforms that also never existed in previous asset classes. And you have a lot of people who made a bunch of money from being early adopters who then had, you know, the confidence to start up venues. So you have a very road set of people coming from very different places entering in and becoming players in this market. Again, so that's just a different kind of starting point than in than in traditional assets. And the third main thing is regulation and compliance, which is what causes a lot of

harmonization in the other markets. So here's what my initial thought. And obviously we can't talk about Omega one and specifically

how you're trying to solve this problem. But when I hear like about, okay, there's going to be a dark pool for crypto, my first thought is, isn't this kind of premature because have we still even gotten to the stage where we know institutions actually have any interest in this at all, let alone some sort of like sophisticated modern trading environment that we think is applicable to much

bigger markets. I would turn that around and say that a lot of the larger institutions that we talked to have a great deal of interest and entering the markets, and then are held back by the lack of regulatory, compliant, secure and liquid solutions to trade on. So it's a

little bit of a chicken egg problem here. It's also the case that although everyone says price action doesn't matter, you know, there are a lot of people who were pushing into the marketplace who at least probably held back on pushing their bosses and compliance departments for approval while the while the price was falling like a knife last year.

And I feel like we've hit the floor, and we're turning on that front, and that is going to make a difference to institutional interest because you know, the institutions are primarily driven by the family offices and you know an asset owners who are seeing the price rises and now again wanting to get back into the asset class.

So when I hear dark pool for crypto, I have a slightly different initial reaction, which is if you think that one of the issues are one of the major criticisms of the crypto market as it exists right now is a lack of transparency. You know, people talk about the sort of murky world of crypto trading and various exchanges um that possibly engage in uh sort of sketchy practices,

maybe order inflation, that sort of thing. And then you think about dark pools, which you know it's died down a little bit, but at one point a few years ago, dark pools had a terrible reputation and we're sort of viewed again as these murky private exchanges where no one knew what was going on and there was all this predatory pricing. Michael Lewis basically wrote an entire book about this.

How are dark pools going to benefit the crypto market, given that one of the major criticisms has actually been a lack of transparency. That's a great question, and I think what we need to do to answer that is look at what he is dark and what isn't. So there's you know, it's it's a little bit cheesy, but we use the phrase we're bringing dark pools into the light because what we're actually doing is, on the one hand,

we're bringing dark pools into the crypto asset class. On the other hand, we're bringing some technologies from crypto and blockchain into dark pools that actually increase the transparency. So what we see in you know, the actual blockchain transactions and more transparent than anything else. We can all see what all of the bitcoin transactions are. It's what's going on off chain in the sort of the murky world of the exchanges and bots, which agree is, you know,

there are some real issues there. So we have one major innovation that we have that no dark pool inequities has, which is that the pricing of access to liquidity on the dark pool is going to be mediated by a

token that is public, clear and transparent. So Bart Chiltern, who's one of our Advisors has been one of the guys who's railed against the sort of h f T dark pool alliances where you know, there's these under the table contracts where high frequency trading firms get their own order types and essentially get to predate on other clients the dark pools in a non transparent way. All of our market microstructure is public, transparent, is going to be audited.

We're working on a big four audit contracts, so actually the pricing, the mechanics, and then even the trades afterwards are going to be printed onto a blockchain. So we're bringing a lot of transparency. So what is the ent

what's the dark part? So the dark part is if you right now want to buy ten million dollars a bitcoin and you announce that intention to the marketplace, you're going to have your face ripped off because you go and you put that on an order and put that order on exchange and just rest everyone's going to see that order and the price is going to move away

from you. God help you actually try to buy that ten million dollars a bitcoin on the marketplace, you're going to eat up liquidity that's going to move the market. Then all the bots are going to get freaked out, and by the time you bought your ten million dollars,

the prices move like five seven percent. You've paid basically three or four percent in slippage costs, and the fact that you paid ten basis points or twenty basis points and fees on the exchange, you're paying eighty times that much in terms of how much you're moving the market. So that's the key thing. But a dark pool changes is it allows you to put that ten million dollar ordering in a discrete way and it gets done at the market mid price, and every trade gets done at

the mid rather than moving out. No I mean, I mean, you're you're plausing because people at home can't see it. But I'm making a weird of making like a skeptical phase.

I'm just still trying to figure out how fundamentally the ten million dollar purchase of let's say it's a bitcoin, even if done on a dark pool or in a dark pool, doesn't have the same issue run into the same issue of eating up the existing liquidity because in the end, you know, there's only so much people at any given moment are selling it x Right, maybe this is a dumb guy I'm just like, if everyone is buying and nobody is selling, a dark pool isn't going

to magically create sellers. But if there are people who have buying intentions that they don't want to reveal because they're afraid they'll move the market away from them, and people have selling intentions they don't want to reveal, and they're both nibbling around the edges, and we give an opportunity for them to meet because they know they're going to meet at the fair market mid price, that enables

both of them to come out. Now, if twice as many people are buying as are selling, the price is still going to be moving up in the marketplace, and you know, the sellers are all going to get fed on on our side, and the buyers are still gonna be waiting for more sellers. But it's a it still has a stabilizing action on the market compared to just putting that order on analytics change. There's a key concept here, which is when I say the mid price, what do

we mean by that? Who's mid price? So any dark pool needs to have an external price reference set because it's not doing the price discovery with the lit orders, So you know where do we get that external price from? And that's a that's a really interesting question to dig into. Now we've looked at what the top fifty exchanges. We looked at that bit wise report about how much of the exchange volume was faked, and that was roughly in

line with our own analysis on this. So when you look at the vast wealth of lit exchanges, you say, where can we actually get a trustable price from. There's actually only a few of those LIT exchanges that you know, we feel are trustable for providing a mid price. So what we're doing is actually UM working with a partner to get pricing from all of the OTC in the market maker desks, so we have a true price that represents the broad set of liquidity in the whole bitcoin market.

And once that price is clear and being sort of communicated out on the exchange and just inviting people to meet at that midpoint, that will have an anchoring, stabilizing effect on the overall marketplace. That's really interesting out of curiosity, how different is that sort of true mid price to some of the prices being reported on the exchanges, Like how much of a gap is there between the two that you've seen so far. Yeah, I mean that's a great question. If you look at the equity dark pools,

it's really simple. There's a national best bid, there's a national best offer, and the dark pool goes and mids between the two of those, and there's you know, fiber optic pipes and microwaves wiring everything together and it's all

clean and in crypto. You can see fifty dollar differences between the mid of the order books on some of these exchanges, and so you occasionally have definitely edged discrepancies with wanted to exchanges that can be as much as fifty or hundred bucks from what is sort of the true weighted mid price. Those often don't tend to be really there if you try to trade those orders, or there's just kind of a few dollars there and everything fades. But the data field, the market data field, is much

fuzzier and crypto than it is in FX or equities. So, as you mentioned um and really with all kinds of networks, but there's a chicken and egg problem with all this stuff. How do you you know, ultimately you can have great technology, but if nobody shows up to your exchange, then there isn't going to be a whole lot of liquidity, even in the best scenarios. So how do you plan to

solve that? Because there's a lot of people out there trying to work on the institutional aspect of crypto in one way or another, whether it's on custodio solutions or exchanges, and you have the legacy it's funny to call them legacy, but you know the the legacy players like coin base, so they're trying to make a big push into institutional trading. How do you plan it can only it can only be so fragmented before there's no liquidity anywhere, Someone or

a few players have to really dominate. So how do you convince different entities of which there still aren't very many, to coalesce around your platform. Number One, there's a minimum ba of the regulatory and security and all of those things the one needs to have to be entering into that conversation. And once you actually really look away that minimum barries, you've cut yourself down to a handful of players, most of you don't even have product out that can

operate at that level. And then from that point onwards, there's two things, at least from how we look at it. One is we have a unique offering that is not actually competitive to the likes of a coin base or a backed or an aeros x or an el max. We're actually talking to those parties because each of them will have excess beard or awful liquidity, and they may have market making operations or OTC desks that will want to have the opportunity to access mid price liquidity through

through our platform. So one having a different offering that actually offers something to all of those players as well as to the end institutions. Two by kind of being adults and professionals, and that filters things down some I hate to say, although not as much as it used to. And then thirdly, and this is where it's a it's

a little bit more creative. We are. We have a cryptocurrency token ourselves, and that token is something that we've designed to um build the network effects on the platform, to reward people for early participation, and to kind of price the access to liquidity on the platform. So you know, this is something that the business isn't sort of built around it. A lot of crypto tokens rely on the token itself to create the network effects, but it's kind

of an accelerant for those network effects. So, Alex, I'm curious how you make decisions about which cryptocurrencies or assets to actually provide trading for on your platform. And this sort of touches a little bit on Joe's totally original observation about Bitcoin SV, this sort of offshoot of bitcoin cash um that Finance decided to delist recently. You know, they said they weren't comfortable with the cryptocurrency for various reasons.

And again, I wonder like what sort of factor as would go into your decision making process about which crypto or what type of crypto trading to provide. So the first thing is, we're only going to be offering where there's already sufficient liquidity in the marketplace for our offering to make sense. So you know, we're starting off with bitcoin only when we launch, and we're going to be doing probably not more than the top ten cryptos for the foreseeable future. You know, we're not the folks who

list two hundred and fifty four hundred different coins. Secondly, the Bermuda Monetary Authority, it is probably a good moment to just talk about Bermuda here. So the Bermuda Montory Authority is and our view the leading jurisdiction for regulating digital assets, and they have a pretty clear framework for looking at what coins can be listed on a registered exchange. For instance, we're steering clear privacy coins because that makes it very hard for us to do the A M

L K ye see that we need to do. You know, there are there are coins which have reputational issues that we talked to the to the b m A about. Uh so where do you see this all going? And you mentioned at the beginning that you're gonna start with sort of what we know is cryptocurrencies, bitcoin and so on, but then you also mentioned like other types of assets

that will be like traded as digital currencies. And I hear people talk about this stuff and the idea of like token izing equity or token izing bons or real estate and being some sort of crypto token, and I still don't understand why that is an improvement or why that is a why that would represent an innovation. So I'm curious in your view, like what the roadmap for all this in terms of what actually is going to

be traded in this way. So yes, I do think that all asset classes are going to be traded on a blockchain, as digital assets, and that the efficiency gains of near immediate settlement and all of the interoperability of blockchains will make a difference. They're not making enough of the difference today to overwhelm the liquidity barriers and other issues.

But where is it gonna go? Like, I just want to push it back or my my when you say that these efficiency gains, because we've had several discussions with people, and one of the consistent themes when we talk about crypto currencies or blockchain whatever is that it's not efficient, that's actually highly inefficient, and that traditional databases are far faster, are far less computationally intensive, are far less energy intensive,

and that blockchains are basically these very clugi costly systems that are good for a narrow purpose. So you when you talk about efficiency gains and those efficiency gains driving more assets to be traded in this manner, that's like the part I'm struggling to understand. So the efficiency is absolutely not but it's more computationally efficient than doing things

in a centralized way. The efficiency comes from the one thing that blockchains are good at, which is giving everybody around the world or everybody in the network the same picture of what's going on consistently and coherently across the whole network. So when you look at equity trading, for instance, that the nanosecond level trading of equities is highly efficient. You're not going to replace that by making it be

traded on a blockchain. But the back end of that equity trading there's still you know, stock certificates in dtc C. There are cases you see where companies have a hundred and five percent proxies because nobody is adding up the shareholding of the companies. There's a huge amount of inefficiency in the layers underneath trading, which is why it still takes two or three days to even settle transactions, even

though the trades are taking place in nanoseconds. So it's more in having a coherent global ledger of who owns what that everyone can trust, which, especially in emerging markets where there isn't even good title to land and things, and you know, there's a lot of the world's population who don't even have identity in the traditional way, you

can make massive differences on that level. And then in the more sort of industrialized capital markets, it's about having a clear common settlement layer and then building a new trade layer on top of that. Well, Alex Gilordan Brander

really appreciate you coming on. Fascinating and I'm really looking forward to watching where Omega one goes and just the general landscape because obviously, like since the end of ten when the bubble peak, there was like so much hype and enthusiasm about the institutional money coming in and then the market flopped, and I'm still like sort of curious where it's all happening. So we'll see if it eventually arrives. Absolutely, I mean it's um, it's definitely different being a crypt

a company in winter and it was in summer. I think shoots of spring are coming through right now, and the good news is it's cleared a lot of the noise and scanners and hucksters out of the space and you know, a strong survive. All right, Well, we'll have you back in a couple of years and we'll see how it all I've developed. Thank you very much, Thank you, Tracy.

I'm really enjoying all of the market structure talk that we've been doing on I'm serious, No, I am too, uh corporate bomb, market structure and now a crypto structure. It's great. I did think. I mean, it's slightly ironic Alex's last point about green shoots coming through now. And you know, one of the things that seems to have the crypto community feeling a bit better lately is the fact that bitcoin has popped for five thousand dollars per

coin once again. But the irony comes through that a lot of people are saying that that pop was actually because of one trade that probably moved the entire market. So the illiquidity in this one instance seems to actually have benefited the crypto market. And I keep thinking, you know, going back to my initial question to Alex, because still, like when I hear like dark pools for crypto, like this is such a new space, Like isn't there still just an issue of anyone even like caring about this

or being sure that this will be around. But I guess, like ultimately it is a chicken egg thing, and you know you can't have uh, you know, institutions aren't going to be interested in entering the space unless they're good tools. And the good tools won't be used unless there's actual institutional interest. So someone's got to build this stuff. If you build it, they might come. I guess we only have to wait. Uh, they might a couple of years to find out. This has been another episode of the

Odd Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Joe wisn'hal. You can follow me on Twitter at The Stalwart and follow Alex on Twitter at Alex Omega One Project. And you should follow our producer on Twitter. He's toe for four heads. He's at four heads t uh. And I want to thank our new producer who will be taking over the reins,

Laura Carlson. She's on Twitter at Laura M. Carlson. And don't forget to follow Bloomberg's head of podcast, Francesca Levie at Francesca Today. Thanks for listening.