Forex Network New York 2019 by P&L Services Ltd.

FOREX NETWORK NEW YORK 2019 phOTObOOK

Contents 4

Panel 1: Trading in Volatile Markets: Is Brexit Just the Beginning?

Panel 2: “Credit: Is It Being Priced Correctly?” Debating the Changing Economics of Credit in FX

Panel 3: “Market Impact – Finding Execution Styles that Work” Market Impact: Friend or Foe?

Panel 4: “The Investor’s Perspective: Allocation Trends in 2019 and Beyond” Is FX a Dirty Word for Allocators?

Profit & Loss Peer2Peer Interview: “Do Cryptocurrencies Still Have a Role to Play in the Portfolio?”

www.profit-loss.com

Panel 1: Trading in Volatile Markets: Is Brexit Just the Beginning?

L-R: Moderator:Robert Savage, CEO, CCTrack • Daniel Volberg, Senior Vice President, Lazard Asset Management • Colin Crownover, Former Head of Currency Management, State Street Global Advisors • Juha Seppala, Director, Asset Allocation, UBS Asset Management • Andrew Ralich, CEO, oneZero Financial Systems

www.profit-loss.com

Panel 2: “Credit: Is It Being Priced Correctly?”

L-R: Michael O’Brien, Head of Global Trading, Eaton Vance • Leah Mallas, Global Head of FX Prime Brokerage and FX Clearing, J.P. Morgan • Christopher Perkins, Global Head, OTC Clearing and FX Prime Brokerage, Citi • Moderator:Galen Stops, Editor, Profit & Loss

www.profit-loss.com

Debating the Changing Economics of Credit in FX

Speakers at the Forex Network New York event highlighted that credit provision and intermediation for non-spot FX products could be set to undergo some significant changes in the near future, although there was some debate about how these changes would play out.

Christopher Perkins, global head, OTC clearing and FX prime brokerage at Cit, set the tone for the discussion by declaring that FX prime brokerage (FXPB) businesses have not been pricing their return on capital effectively and that, as a consequence of this and incoming regulations, these businesses need to fundamentally rethink how they charge for their services. In particular, he argued that FXPBs should start charging execution brokers (EBs) rather than just clients for their services, a view that has since been advocated by Citi in a recently published whitepaper. “When you step back and look at the value proposition of FXPB for clients, we’re giving them operational efficiency, capital efficiency and maybe some legal efficiency. Now, if you turn around and look at the value proposition we offer EBs, we’re giving them operational efficiencies and capital efficiencies because we’re posting margins to them and consolidating their exposures with the prime broker, in many cases reducing their margin call, assuming the client credit risk and taking on the client-facing RWA. So although we offer value to both the clients and the EBs, traditionally the client pays for everything. So I would argue that this business model needs to change – people who are given value need to pay and therefore the EBs need to start paying,” said Perkins. Further, Perkins claimed that the current pricing model of FXPBs is about

to become even more unsustainable in the face of the Uncleared Margin Rules (UMR) that are due to start hitting some buy side firms in September 2019, and then even more in September 2020. Under these rules, for non-spot FX products FXPBs will have to begin posting out collateral to EBs and, as Perkins pointed out, every time margin is posted out of the door it costs money. He added: “PB is going to get more expensive if you’re trading in derivatives and swaps, whether you like it or not. Should we saddle the buy side with all of these costs? I would argue: no.” The real credit challenge

By contrast, Leah Mallas, global head of FX prime brokerage and FX clearing at J.P. Morgan, does not think that the overall FX PB market is significantly mispriced right now. “I think clients appreciate that there is value to the FXPB business which involves us taking on risk and providing credit”, she said. Mallas added: “For a while it felt like there was a race to the bottom with FXPBs competing only on price but we tried to right-size that a few years ago.” Pressed on whether the changes brought about by UMR could impact JP Morgan’s FXPB pricing model, Mallas said that they already consider these www.profit-loss.com

rules when considering client portfolios and the bank is ready to offer more central clearing to clients, should the market move in that direction. Offering a buy side view on this issue Michael O’Brien, head of global trading at Eaton Vance, said that while he understands why FXPBs might want to split costs across both the clients and the EBs, ultimately no matter how the up-front costs are structured it is the clients that will end up footing the bill. “From my perspective, I like to see explicitly what I’m paying. So long as that’s transparent, I can manage that charge in whichever direction it goes,” he said. Importantly, O’Brien added: “I think it’s the access to credit that’s the challenge, not necessarily the cost of it. The minimum volumes needed to be an attractive PB client can be challenging even for large asset managers. So I think that one of the potential solutions here is central clearing in addition to the FXPB model, a combination of both could work for asset managers, especially if your FCM and FXPB are the same institution so that you get more operational efficiencies. We’re at a point now where we’re clearing virtually all of our deliverable and NDF trades that are eligible for clearing, partially because it’s a different way and an easier way to access credit than we’ve had in the past.” FXPB Vs. Central Clearing

This in turn led to a debate amongst the panellists about whether central clearing could eventually become the prevalent credit model in FX for nonspot products. “I think the two models will co-exist. Hedge funds will probably be slower to move away from the FXPB model because it’s already providing them most of what clearing would give them and there’s no regulatory mandate for clearing FX – there’s nothing forcing them towards this model. Asset managers will probably start clearing FX products first, especially the ones that are already clearing other products they trade. Over time, we might see dealers pricing it differently, with one price for clearing and another for FXPB.” said Mallas. To which Perkins responded: “I slightly disagree with that view. I think that when the final UMR threshold is reached in 2020, it will be a bookend and the NDF market is going to essentially clear by that point in time because you can’t ignore the costs that will arrive. I don’t know what will happen with FX options, there’s still a big question over that, but if a trade can clear, then it’s going to clear because the economics are so profoundly different.” However, Perkins was quick to add that he thinks the FXPB model will continue to exist, and that indeed under the UMR rules this service will actually become more valuable to market participants because of all the capital effi-

10 www.profit-loss.com

ciencies it can provide to help clients cope with the new requirements. For his part, O’Brien agreed that NDFs will largely move towards central clearing but that in most cases the decision about whether to use FXPB or central clearing will be product specific and situation specific. “I can imagine a scenario where buy side traders are deciding whether they are going to use FXPB or central clearing when executing a trade on almost a trade-by-trade basis. So at the extremes I think that spot will always be traded via FXPB and I think that NDFs will go towards clearing, but for everything else in the middle I think there will be a divergence with firms using each service for different types of trades,” he said.

Infrastructure still lacking

However, the panellists did explain that there are some sizable infrastructure challenges that are preventing many FX products from becoming centrally cleared right now. For example, Perkins noted that while LCH has launched a service for clearing FX options, it is currently only for dealers and it will take time to build out the ecosystem necessary to manage the risk associated with clearing physically -settled options for buy side firms. Or, that perhaps liquidity will alternatively develop in a cleared, cash-settled options product. He added: “Essentially, in order to clear an FX option it has to be cash settled, but that introduces basis in and of itself. Think of how complex the world could get when you have all these different products with different economics but that are really the same product. Let’s take forwards, for example. You could have a physically settled forward, a cash-settled bilateral forward, an LCH cleared cash-settled forward and a CME cleared cash-settled forward. That’s four forwards with slightly different economics and basis, it could get very complicated.” “There’s really no solution yet for FX options,” agreed Mallas. “The dealers are testing out the LCH service but it’s going to be a while until that is sorted out, let alone getting clients on there. Some clients want to be clearing FX options sooner but there’s no viable solution today for them to do so.” O’Brien also agreed that the infrastructure is lacking for asset managers to clear many FX products, stating that while the FCMs themselves are ready to clear the executions desks at the banks are not. “The problem isn’t that the executions desks don’t want to do this, the problem is: how do you get a trade from an execution desk into clearing? How do you go from one to the other? In rates and credit there were good solutions to this issue, but there isn’t such an obvious one in FX,” he said. The good news, added O’Brien, is that most buy side firms won’t be impacted by UMR until 2020 and so the FX industry has some time to work on building a scalable solution to this problem.

www.profit-loss.com 11

12 www.profit-loss.com

www.profit-loss.com 13

Panel 3: “Market Impact – Finding Execution Styles that Work”

L-R: Moderator: Paul Aston, CEO, Tixall Global Advisors • Douglas Cilento, COO, Dynamic Beta • Jim Cochrane, Head of Sales N.A., BestX • David Mercer, CEO, LMAX Exchange • Brandon Primack, Head of Execution, Management, Americas, 360T • Kevin Wolf, CEO, FastMatch

14 www.profit-loss.com

Market Impact: Friend or Foe?

Speakers at the Profit & Loss Forex Network New York event highlighted that how you define, measure and respond to market impact when trading FX depends on a number of different variables. Opening the discussion ‘Market Impact – Finding Execution Styles that Work’ moderator Paul Aston, the CEO of Tixall Global Advisors, argued that while there are a lot of ways to define what constitutes “market impact”, at the end of the day it represents a cost for firms trading FX. “The way that I look at it as negative alpha. And so if you can recognise it and measure it using more advanced TCA, particularly pre-trade and in-flight TCA, then you can conserve on negative alpha, which is then positive alpha,” he said. Doug Cilento, COO of Dynamic Beta, concurred, stating that throughout his career managing execution for systematic hedge funds and asset managers, he always focuses on market impact as the primary measurement of trading cost. Indeed, when it comes to calculating the cost of trading, Cilento said that if your execution style involves breaking trades up into small pieces and disseminating child orders through the market via algorithms or other strategies then you should be more concerned about your overall impact as opposed to bid/offer spread that you might pay on any one transaction. “It’s a key component of understanding your execution costs, which if you’re a systematic fund manager you need to incorporate into your portfolio generation process to know what to expect to pay,” he added. Jim Cochrane, head of sales for North America at BestX, added another layer to the discussion by differentiating between market impact at a technical level and information leakage, which could in turn cause market impact. “Market impact is part of our cost model,” he said. “We measure execution

rates outside the bid/offer spread as potential market impact, and then we display that in BestX with the aim of helping our clients minimise that spread. However, on an algo trade where every one of your trades might be at or inside the bid/offer spread, that in our equation will have zero market impact, but at the same time it is possible that you’re moving the market against yourself because of information leakage or because of how the algo was deployed.” “Drinking the Kool-Aid”

David Mercer, the CEO of LMAX Exchange, however, offered a different perspective by arguing that market impact is not always a negative thing for firms trading FX. “So I know this is a little contrarian to say, but the market has drunk this KoolAid in the last two years that market impact is always a bad thing. I have a bunch of day trading firms who love market impact, they actually want to create it. And if you think back to the old days of FX, if you wanted to sell $100 million the last thing you did was start selling in $10 million pieces, in fact, you probably bought $50 million. That’s the reality of it, sometimes you want the market to react, sometimes you want that information leakage,” he said. In terms of TCA, Mercer highlighted five metrics for measuring execution that both liquidity providers (LPs) and trading venues should offer buy side firms

www.profit-loss.com 15

as standard: the bid-offer spread, their fill rate, the hold time on their trades (if last look is being used), their price variation and their market impact. “If you’re not measuring those five things post-trade to inform your next pretrade decision, then you probably shouldn’t be in charge of execution strategy,” he added. Mercer, a long-term and vocal critic of last look in FX, also argued that this practice makes measuring market impact more challenging because different LPs might operate different hold times on incoming trades and during the difference between these times orders can be broadcast to the broader market. Cilento responded that whether or not market impact is a positive or a negative when trading FX really depends on the alpha decay profile of the strategy being implemented. “If you have a short-term alpha decay profile, you’re getting in a trade and hoping that the market moves so that you can get out of the trade at a profit, then you want market impact – that is your alpha. But if you have a long decay profile, or zero alpha, then you definitely don’t want to see market impact. You want as few people to know what you’re doing, you want markets to stay steady all day. So it really depends on your alpha decay and your trading horizon,” he explained. Risk concentration Similarly, Brandon Primack, head of execution management for the Americas at 360T, pointed out that firms with different trading styles and requirements will have very different priorities regarding their FX execution. For example, he said that many of the firms trading on the 360T platform are non-alpha generating and therefore are not necessarily making decisions based on how many milliseconds an LP might be holding their trades for. By contrast, Primack claimed that many of these firms might be more concerned with the ability of their LPs to warehouse risk. “When I look at my book and my statistics, the concentration of flow ends up in such a small number of LPs. The rivers flow to the oceans and there really aren’t that many unique LPs warehousing risk that you want to be there time and time again on the other end of your flow. So we focus a lot of our education efforts with clients around this area,” he commented. The fact that different client types will have different priorities when executing FX is why Kevin Wolf, the CEO of FastMatch said that he tries to let clients lead the conversation in this regard. “In terms of the framework and the metrics that were laid out, I don’t disagree with any of that. But the reality is as a platform provider and a service provider, we don’t tell our clients what to care about. Yes, we try and educate them and help move the market forward, so if someone says to us that they care about hold times we’ll help them optimise hold times for their trading, if they care about market impact, we’ll help them understand that better. But in practice it’s not always black and white for us because,

16 www.profit-loss.com

for example, with someone wanting to know more about their market impact the next question is always: well how do you measure it? Because not everyone measures it in the same way. Response times, fill rates, post-trade price impact, reject rates, part fills, spreads, cost of rejects are all important, but not always equally as important to all of our clients. We get all different types of firms using our platforms and over time you see their views and approaches change, and as they do we have to continue supporting them,” he explained. Cutting through the noise

The panellists then moved on to discuss the challenges associated with the data analytics required in order to preserve alpha, with Mercer arguing that this largely consists of the simple arithmetic of taking the point of a trade and then marking it out by currency pair, time of day and market volatility. However, Cochrane argued that although some of the mathematics involved in simply working out the costs of a transactions are not that complicated, it does get more complex when the analytics look at hundreds or thousands of trades to pick up trends that are occurring in the market after a firm trades. In addition, he claimed that finding and using the right data set to make such analytics effective can also be tricky. “I would agree, it’s simple but the data is noisy,” added Aston. “You’ve got a cocktail party problem where there’s lots of different sources of information all making noise at the same time.” To which Mercer immediately responded: “Which part of the data is noisy? It’s not the underlying price. What’s noisy is if you have a myriad of last look feeds because most of that isn’t real liquidity…..People tell me that they have 50 different price feeds, but the fact is, they don’t. They probably have three firm and three decent non-firm feeds, and that’s it. They could chuck the rest away because it’s all reinvented, that’s where the noise is coming in.” From a buy side perspective, Cilento said that the big challenge around what the other panelists were referring to as “noise” is figuring out the degree to which market moves that occur after trading were caused by your trading or by external factors. “If I’m buying $200 million dollar/rand and someone else is buying a yard of dollar/rand, am I impacting the market? Are they impacting the market? You need to have a lot of data for statistical significance – to be able to say my impact is 20 basis points. And once I know that my impact is 20 basis points then I can start to unpack what’s driving my market impact and look at what factors I have control over, and I can start to tweak my strategy in order to reduce that impact. But the challenge is statistical significance, knowing that this was my impact and not some other random event in the market,” he said.

www.profit-loss.com 17

Finding patterns in the data

Primack was quick to agree with this last statement, adding that he sees clients doing repetitive trading patterns against a fixed liquidity pool, and that often these patterns start to rhyme. “So you can start to break out: what’s me and what’s the liquidity provider? What is the last look hold time? Because not all last look is created equal, I think that we can all agree on that. So even without having a full dataset for the market you can dig into the numbers, especially in a disclosed trading environment with a fixed liquidity pool behind it, and start to pull out what I’m doing versus what the market is doing,” he said. This conversation is exactly why FastMatch launched its consolidated tape for FX, said Wolf, explaining that it is not designed to replace the data set that firms are using to analyse their impact on the market, but rather should be thought of as a supplemental piece of information that can be used to aid this analysis. “The tape has a role in the world of TCA and we are seeing TCA providers consuming the tape. At $100bn of ADV, the product is still evolving. It doesn’t replace any of the other data we’re talking about, it’s complementary to what already exists,” he said. This led Aston to observe how challenging it can be to measure information leakage, which he described as a latent variable in what had been discussed previously. According to Aston, looking at transacted data, events that were time-stamped and the prices and volumes associated with that, is “water under the bridge”, whereas what trading firms need to know is how their presence in the market and their interaction with the market is fundamentally changing the behaviour of others. “So if there’s a configuration of the order book and I go and touch top book or I sweep some liquidity, what is that implicitly transmitting to the existing orders? Are there going to be removals in terms of cancellations or expiries? Or other changes to that order book? If I touch the order book, have I changed the liquidity that I subsequently have to deal on?” he questioned. Aston added: “Then there’s the issue of market impact coming from the leakage of , for example. So if I deal with a counterparty that’s going to internalise my trade and none of my information leaks out versus somebody who’s immediately exhausting that back to the market, am I actually trading against my own flow? So the minute I actually go lift an offer, is someone else now offsetting that liquidity and then I’ve actually doubled my footprint implicitly because of, the types of counterparties I’m in interacting with? So that information leakage and the the liquidity that you’re seeing is still going to be there, I think is also a very important thing to consider. And this is difficult to measure.”

18 www.profit-loss.com

www.profit-loss.com 19

Panel 4: “The Investor’s Perspective: Allocation Trends in 2019 and Beyond”

L-R: Moderator: Robert Savage, CEO, CCTrack • Jackie Rosner, Managing Director, PAAMCO Prisma • Arvin Soh, Investment Manager, GAM • Michael Dever, CEO, Brandywine Asset Management

20 www.profit-loss.com

Is FX a Dirty Word for Allocators?

Although FX as an asset class still offers potential for returns, asset managers are increasingly reluctant to allocate funds towards trading strategies that are only focused on FX trading, said speakers at the annual Profit & Loss Forex Network New York event.

On a panel session looking at allocation trends, the moderator observed that the speakers had avoided talking about ‘global macro’ or ‘FX’ strategies during the discussion, prompting the questions: “Is the phrase ‘I’m a foreign exchange-focused manager’ or ‘I’m a global macro manager’ out of favour still? Is FX a four-letter word?” One speaker from an asset management firm said that they think that FX is still an exciting sandbox to play in because there’s so many different potential trading opportunities available within this asset class, adding that they think there’s still plenty of opportunities to generate alpha within the global macro universe, which they generally think about as being focused on rates and currencies. They said that although some people have been disappointed at how gamma and short-term volatility has been so low in currencies and rates, there are pockets of liquidity gaps and disconnects that offer trading opportunities. In particular, the asset manager pointed to the USD/JPY move at the start of the year as an example of this, stating that we’re living in a world where these types events will continue to occur and therefore looks to allocate to funds that are able to effectively capture these moves. Looking for consistency

Following on from this, Arvin Soh, until recently a portfolio manager at GAM Investments, said that in the past, his clients would have been happy for him

to allocate funds to a manager only trading FX on the basis that it would offer diversification to the portfolio and is non-correlated to equities. Although it might mean the volatility would be a little higher and the Sharpe Ratio a little lower, logic would have suggested that this manager would be additive to the overall portfolio. However, he then added: “I would say that’s not where our clients are now. Our clients want consistency, and consistency tends to imply diversification. So it’s very difficult for us to invest in a manager that only does FX, or only does commodities for that matter, because our clients want us to have that broader diversification. And it makes complete sense from their standpoint – they don’t want to have to tolerate a 15% drawdown and so if they can get the same returns without having to do so, then they will. I think that definitely makes it more difficult to be an FX-only manager now versus a few years ago.” “I would say that there is still interest in newer managers and smaller managers, but they have to be really different” Speaking of returns, the asset manager said although they would always prefer to see the macro managers that they allocate funds to generate more profits, the main reason why they hire these managers is because they expect them to know when to be long beta and short beta. This is effectively, they said, the alpha that these managers offer via their active trading. The asset manager also revealed that the firm has weighted its allocations much more towards discretionary macro strategies rather than

www.profit-loss.com 21

CTAs for a number of reasons, the most obvious one being that the average CTA trades with double the volatility and half of the Sharpe Ratio of the average macro trader, because the former is typically using a systematic and more passive strategy. The role of CTAs

This prompted a discussion about the role of CTAs within investors’ portfolios, with the moderator pointing out that the last time that this category of funds broadly produced good returns was 2014 and that, although uncorrelated to the stock market, they didn’t perform particularly well in December 2018 when there were drops – although brief – in the equity markets. In response to this, Mike Dever, CEO of Brandywine Asset Management, a CTA that has been in business since 1982, said that he’s seeing an increased interest in crisis alpha-type strategies from investors. “I can give you two examples of this right now,” he added. “One is an investor family office that made money through an investor company that owned and then sold. They’ve been hedging their own long equity exposure and they kind of converted that into with options and then they’re looking for us to create something using futures strategies that – although not a perfect hedge – is likely to give them better protection in a down market. So it’s like a trend following type of a scenario, but there’s a pretty decent probability that it’s not going to be losing money like an options hedge is for them during the up market environment.”

22 www.profit-loss.com

Dever continued: “The second example was an investment for a wealth manager who had a lot of clients that began getting nervous after their equity positions lost money in downturn last year. Brief as this downturn was, they’ve just been so used to making money. So we’re telling them to identify the clients that are most at risk, the ones that are most vocal and nervous right now, and we’ll sit down with them to create some sort of hedged-type product that will make these clients more comfortable maintaining their positions. This is a portable alpha type strategy whereby they don’t have to give up what they’re doing, but they get exposure to something that may provide negatively correlated returns.” Investors getting nervous

The asset manager agreed that some investors are getting nervous, stating that there’s a growing concern that after 10 years of quantitative easing, of easy money, low rates and this massive rally in equity markets, there is too much equity beta in many portfolios. They predicted that there will be more volatility coming at some point, and not just in equities but across rates and currencies too, and that is why there is broadly an increasing inclination amongst asset managers to look at more volatility-friendly strategies. “If you’re a CTA only trading FX with a time horizon of one to two months, you’re going to have a hard time” Indeed, the asset manager said that their firm is embracing this possibility by reducing its equity beta and shifting towards more positively con-

vex strategies such as global macro or quant strategies. Likewise, Soh said that GAM Investments has also moved away from strategies with more beta, particularly equity and credit beta, since the beginning of 2018. “We used to have maybe 30-40% of our investments in those areas and it’s basically halved since then. Part of this has gone to macro strategies, some of it has gone to systematic strategies, some of it into just more market neutral strategies and then a little bit more into vol strategies. We’re not trying to make a market call, or at least let’s say a directional call, but we do think that it appears that there’s more opportunities outside of equities,” he said.

Small funds need to differentiate

Another key talking point on the panel was the extent to which size dictates allocation decisions, with the moderator questioning whether there is a significant appetite to allocate to smaller funds given that there appears to be growing cost overheads for trading in today’s financial markets.

“I would say that there is still interest in newer managers and smaller managers, but they have to be really different,” responded Soh. “If you’re a CTA only trading FX with a time horizon of one to two months, you’re going to have a hard time. It’s not that there isn’t a price for this, it’s just such a low price that it probably isn’t worth it for the manager. But if you’re doing something very different, and crucially if you’re good at it, then there is an argument for investing in these funds. We do still invest in managers that have around $10 million in assets, but I would say that the hurdles for these smaller managers to get investment is higher now.” The asset manager agreed that it has become harder for smaller fund managers to attract investment, but noted that the degree of difficulty can often vary based on what strategies a particular manager is employing for what objectives. For example, they said that it is challenging for funds using quant strategies to compete with the technological spend available to the incumbent players in the market and therefore the failure rate for these new funds is higher than average and as such, the hurdles to getting investment can be higher.

www.profit-loss.com 23

Profit & Loss Peer2Peer Interview: “Do Cryptocurrencies Still Have a Role to Play in the Portfolio?”

24 www.profit-loss.com

L-R: Galen Stops, Editor, Profit & Loss • Rob Catalanello, CEO, B2C2

Do Cryptocurrencies Still Have a Role to Play in the Portfolio? At the Forex Network New York event, Galen Stops, editor of Profit & Loss, sat down with Rob Catalanello, CEO of B2C2 USA, to talk about whether the case for including cryptocurrencies in an investment portfolio is as strong as ever. Galen Stops: In 2017 when the price of cryptocurrencies kept going up and up, the appreciation of these assets was an obvious argument in favour of investing in them. But now that we’ve seen the price come way down from those heady highs, is the case for including cryptocurrencies in an investment portfolio still as strong? Rob Catalanello: Well, if you’d asked me 18 months ago, I would have said: don’t confuse brains with a bull market! We’ve seen massive washouts in all sorts of markets over time. For example, crude oil went from nothing to $140 per barrel and then back down to $30, and then you had the tech stock bubble – back then I used to walk past the New York Stock Exchange and see some company that was selling coffee mugs online IPO-ing at $9 billion or something ridiculous like that. This happens, but something that I’ve learnt in my career is that as assets mature and there’s a demand in the real economy for them, that’s when you start to get a base of value for those assets. I’ve spent the past two years working as a consultant for a couple of blockchain technology companies, and as the coin prices were ripping to the upside they, much like firms in the real economy, didn’t want to touch this because they couldn’t afford it, they couldn’t afford to pay a miner to put the block together for them. And as the price has come down, the demand for the underlying technology, whether utilising one of the existing coins or some other form of it, has really gone through the roof. So for that reason, as well as the proliferation of other tokens that we’re seeing that are attached to hard assets, like oil or gold, I do think that there’s still a place for cryptoassets in investors’ portfolios. GS: Another argument in favour of including cryptocurrencies in a portfolio that I’ve heard a lot is because they’re uncorrelated to other assets. But as more institutional level players get involved in this market, is that still the case? For example, we’ve seen a lot of prop trading firms become very active in the crypto markets, and because they trade across a number of different asset classes their models generally mean that if they get hit in one market it will impact their pricing in other markets. So doesn’t this start to naturally build correlations between cryp-

tocurrencies and other assets? RC: I actually did my master’s thesis in statistics and this question reminds me of something my advisor said when I was writing it. He said: “Give me a time series long enough and I can come up with any conclusion you want.” What I’m saying here is that the actual time series of tradable prices and real data available in this space is very limited, so trying to come up with robust correlation calculations versus other asset classes is difficult. It’s a bit like we saw in emerging market currencies – initially it was hedge funds that wanted to trade these currencies, liquidity was spotty and if something was happening in Indonesian rupiah they might want to trade Mexican pesos, or if something happened in Mexico they would start dumping pesos and buying other currencies. But once the corporate community got involved and started to hedge their revenues in emerging market currencies, that’s when the currencies became tradable and non-correlated. So I think we’re just going through a similar adjustment process in this asset class. GS: Isn’t another problem just the scale at which most large institutional players invest? I mean, if I wanted to buy $1 billion of bitcoin, that’s probably going to be pretty challenging, especially considering there are people out there still trading via Skype….. RC: The reality is that you really can’t buy $1 billion of bitcoin today, you just can’t. That being said, we at B2C2 just completed our one millionth OTC crypto trade, but that’s not including all the trading we do on exchanges. At this point I think that we have a pretty good handle on all the back office issues, the settlement issues, all the payments that need to be done, etc. We’re streaming prices – actual dealable prices, not the type of prices where you try to hit it and suddenly it’s gone away – we’ll connect to your API, if you want a GUI you can have that, if you want to call us we’ll do that too. So I think that the service level in the crypto markets is getting towards the level that institutional clients, and particularly the real money clients, are accustomed to and expect. I think that will make it easier for them to make the leap of faith into this market, regardless of its size. Once people realise that they can store their coins safely and securely, that the fiat money is going to show up when they expect it to, that everything is going to settle on time in

www.profit-loss.com 25

the accounts and that they can get the same sort of service they would get from an FX desk, they will become much more confident about investing and trading in this market. GS: But even putting aside this question around infrastructure for the moment, isn’t part of the problem that the actual size of the crypto markets is simply not big enough to move the dial for a lot of institutional sized players? RC: It depends. If I wanted to put trillions of dollars to work, to take all of Pimco’s assets and put them into crypto then you might not be able to do it. But if you have a fund with a few hundred million dollars, you could easily put that to work in this market. So it really depends on the size that you’re talking about here. Clearly, this market is not as liquid as FX, but there is enough whereby institutional investors can be involved in a meaningful way. GS: So when the price of cryptocurrencies was spiking, people were constantly talking about this wave of institutional money that was going to move into this space. So far we haven’t really seen this materialise – is this still coming and what’s held it back so far? RC: Let’s face it, some people still don’t understand the crypto markets and a lot of people were confused about what the assets were. But what I think has happened is that the decline in the value of these assets has shaken out some of the more marginal players in the market, which is a good thing. People want to be confident, not just in the asset that they’re trading, but in their counterpart to a trade. The fact that an asset goes from 60 cents to $1,000 in 12 months is great, but that doesn’t make a market. And it doesn’t mean that professional investors will be confident they can fulfill their fiduciary responsibilities to their clients while trading this asset. I think that the drop in price has actually been healthy because the people that have weathered the downturn and are still here are the ones that have worked hard to deliver pricing, customer service and security to make investors more comfortable in this market. GS: Ok, one last question. At one point the narrative in financial services was very much that bitcoin was bad but blockchain was good. Then there seemed to be a lack of actual useful blockchain solutions coming to market while cryptocurrencies took off again. Is there a danger that the pendulum swings back once more and investors start focusing on ways to invest in blockchain the technology as opposed to cryptocurrencies? RC: If the blockchain firms are coming up with more efficient ways to mine coins, and that in turn helps broader acceptance of the product and adoption of the underlying technology, it’s sort of a virtuous circle. I think the most important thing, though, is for people to really do their homework and try to understand what it is they’re investing in as opposed to buying something because it’s going up or selling it because it’s going down.

26 www.profit-loss.com

www.profit-loss.com 27

28 www.profit-loss.com