We sat down with Ben Roth to get a little of his background and thoughts on the crypto asset space and its future. What follows has been lightly edited for length and clarity.
Can you tell us a little bit more about your previous work experience?
BR: I started my career as an equity derivatives market maker at Optiver, a Dutch proprietary trading firm which trades securities and derivatives on all major futures and stock exchange globally. I stayed at Optiver for about 7 years and then left to join a similar company called Eclipse Trading in Hong Kong as one of the very first employees. These firms (and many just like them) are now commonly referred to as High Frequency Trading (HFT) businesses.
Subsequently, I worked for FNY Capital and Hudson Bay Capital, two NYC-based hedge funds, where I managed a portfolio of volatility arbitrage and global macro strategies.
How did you end up at Kenetic?
Around this time last year I spoke to the CEO of Kenetic, Daniel Weinberg, a previous colleague of mine at Optiver. He explained the vision and opportunity for Kenetic in Blockchain. I had been interested in crypto trading for years, having owned and traded Bitcoin since 2013, however it wasn’t until I did a deep dive into decentralization and distributed ledger technology that I realized how big the opportunity was, beyond just the transfer/store of value use-case offered by Bitcoin. Once I dove in, there was no going back and I quickly decided to make the jump out of traditional finance, joining Kenetic as the company’s Global Head of Trading.
In the broadest sense, my most important task is to build, maintain and continue to improve the company’s trading strategies and infrastructure, allowing our talented team of quants and traders to perform their best. Given the nascent stage of the industry, building and maintaining the aforementioned trading infrastructure has been quite the challenge.
What are the key differences you have seen between trading in traditional markets and trading crypto currencies?
BR: First is volatility, as all market participants are pretty aware of by now. In general, crypto currencies have moved at an annualized volatility of 100%, give or take. To put that into context, most of the major stock market indices move at 10–15% annualized volatility, gold is similar, and currency pairs even lower.
Furthermore, the price moves tend to appear fairly random, often unaccompanied by any meaningful news that would imply a fundamental change in value. Supply-demand imbalances are frequently the causes of price movement. The human condition is ingrained with a desire to seek reason for things, moreover we always want to know why?, which makes the seemingly random price behaviour of this market frustrating to many participants.
The last thing that sticks out about this asset class (and yes, I just called it an asset class) is the very fragmented landscape. You see the same assets being transacted on a number of different trading venues, which makes price discovery somewhat inefficient — at least in comparison to traditional markets. This is likely to change as the asset class matures and we see consolidation of liquidity to fewer and larger venues, however that process will take some time.
What, in your opinion, is keeping institutional investors from entering the space?
BR: I’d say the two biggest things that are holding institutional money back are custody and regulation.
When we talk about custody in financial markets, we are referring to the party that is holding your assets in safekeeping. There currently is a dearth of options when it comes to qualified custodians in the digital asset arena — we have not yet seen any of the large, established names like State Street, JP Morgan or BNY Mellon enter the space because they themselves are yet to fully work through the myriad of technical, legal and regulatory issues to the point of gaining sufficient comfort to enter the asset class. This makes it difficult for a lot of institutional participants to enter the market because they are forbidden by law and/or regulation to custody their own assets — a prime example being hedge fund managers domiciled in the USA with Regulatory Assets Under Management exceeding $150mn. Many of these hedge funds have a large appetite to enter the crypto markets, but due to the SEC’s Custody Rule, are unable to do so without a qualified custodian holding these digital assets on their behalf.
Somewhat related to the issue of custody, is regulatory risk. Regulators globally are scrambling to work out how to define cryptocurrency and therefore how to regulate it to protect retail investors and the financial system as a whole. Until we get very well-defined solutions, we are likely to see most of the institutional money remain on the sidelines — there is just too much reputation and legal risk for large institutions to enter the space before there is clarity around definition and regulatory treatment of these assets.
We’re going to see a lot of headway on regulation and custody in 2018, and certainly by 2019 I am confident there will be plenty of solutions in place, but until then, institutional money will continue to come in at a trickle, not a flood.
What are people like yourselves currently using to execute trades in crypto?
We concentrate predominantly on automated trading. We do a little bit of manual stuff but most of the trading we do is through the algorithms and automated systems that we’ve built internally. Those systems are a kind of patchwork of Excel, Python and various other coding/scripting languages that our quants and devs have thrown to together as and when required. This has worked sufficiently well for us with regards to order and execution management, however the absence of a bona fide suite of position and risk management tools has definitely been frustrating. Additionally, connectivity to exchange venues and management of the trading infrastructure has been somewhat difficult because we are connecting to so many different venues and they all use different technology and language for their API connections. Many of our strategies rely heavily on speed and precision — two things that are difficult to achieve in such a young, fragmented landscape.
These issues are what prompted us to seek a solution and ultimately resulted in our collaboration with Tora and the creation of Caspian. We felt that there was a really big hole in the market and knew that if we were having these issues, even with all of our in-house trading and tech expertise, then a lot of other market participants must be having similar issues as well.
How do you envision the evolution of the crypto trading business in comparison to traditional trading assets, and what needs to be done on the technology front?
BR: I raised the issue of settlement and custody solutions earlier. I think we are going to see some institutional-grade solutions built this year. There are already a number of teams that are working on solutions and a few of those initial efforts are being used already, with varying degrees of success. We’ll continue to experience progress on this front and I predict that a major global custodian will officially enter the space within the next 12 months.
I spoke earlier about the high level of price volatility in the asset class. I expect volatility will continue to fall as we see more “smart” money enter the space and get a corresponding consolidation of liquidity into larger, superior exchange venues. These developments ought to produce more efficient price discovery and deeper, highly liquid markets — good outcomes for all market participants. We may also see a few of the decentralized exchanges begin to attract more liquidity as market participants become more accustomed to trading on this type of venue.
On the technology front, institutional participants need the ability to access all the major liquidity venues with the same interface. Additionally, risk management and reporting solutions must be built, enabling these participants to conduct their activity in a way that is consistent with how they act in traditional markets. These solutions are coming, and there is a lot of money ready to wade into the pool as soon as they arrive.
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Caspian is a full-stack crypto asset management platform tying together the biggest crypto exchanges in a single interface. The platform also offers compliance, algorithms, portfolio management, risk and reporting. Led by an experienced team of developers, and leveraging the capabilities and resources of two existing, successful financial businesses as its co-build partners, Caspian is building an ecosystem that enables sophisticated traders to operate more efficiently and improve their performance.