In a sign of how close digital and traditional markets have become, cryptocurrency traders can no longer live without knowing what’s happening on stock exchanges.
Tightening links between price moves in US equities and cryptocurrencies are forcing digital asset hedge funds to consider shelling out for expensive data from stock exchanges and other traditional markets, in a shift from previous years when it was possible for these firms to profit on Bitcoin’s moves without clues from other asset classes.
The influx of traditional trading firms into crypto, who already have such inputs, is also adding to pressure to gobble up more data due to intensifying competition in digital asset markets.
As a result, large crypto trading firms could see their market data costs rise to as much as $500 000 per month, according to several hedge fund managers, from near zero currently. Other than leading to heftier market bills, the moves further tighten links between the world of digital assets and Wall Street.
“The headline here is that you absolutely need data from traditional markets,” said Jonah Van Bourgh, global head of trading at Cumberland, the digital asset trading arm of DRW. “If you’re trading Bitcoin right now, you’re effectively trading macro so you need that data to survive and to make money.”
As an offshoot of DRW, a Chicago-based trading giant, Cumberland has access to market data from all asset classes. This is a luxury that crypto native firms are craving.
In recent months the price of cryptocurrencies moved in sync with US stocks, making the correlation between digital assets and two key indices, the S&P 500 and Nasdaq, the strongest since 2010. The close relationship has turned Bitcoin into a version of equities, an asset that goes up when investors are feeling optimistic about global financial conditions and sinks when concerns about growth flare up.
“Despite all the talk of Bitcoin being a good inflation hedge or it being the new gold, the only thing that mattered for prices were stocks,” said Francesco Filia, founding partner of crypto hedge fund Fasanara Capital. “It’s quite a clear correlation.” For now, Fasanara trades without input from traditional markets.
Wintermute is of of many companies weighing whether to add market data from futures and equity markets to its inputs, according to Evgeny Gaevoy, the London-based crypto market maker’s chief executive.
“With increased correlation between traditional and digital asset prices, we of course can’t ignore the traditional data feeds,” said Gaevoy, which trades as much as $7 billion worth of digital tokens a day.
Tyr Capital, a Geneva-based digital asset manager, is also planning to increase the type of financial data it buys. Tyr is gearing up to expand its activities and to trade tokenised commodities and oil, said Ed Hindi, chief investment officer at the fund. At this point, market data will become a key input, especially as Hindi expects these new strategies to become a big part of the fund’s trading strategies.
“Tyr Capital will need more market data from the TradFi world especially when we start actively trading tokenised financial assets in the coming 24 months,” Hindi said. For now, Tyr Capital relies on data from currency markets only.
Paying for data would be a sharp shift from previous years when the funds and other crypto specialist trading firms could thrive simply by relying on free inputs from exchanges where Bitcoin and its peers are traded. That’s now changing. Unlike in stock and currencies markets, crypto exchanges give away trading information for free to their customers, rather than charging tens of thousands of dollars a year for information about prices and liquidity.
The largest clients of LMAX Group’s institutional only crypto exchange are already subscribing to data feeds from LMAX’s other markets, such as FX and metals, said David Mercer, the company’s CEO.
‘It is entirely natural as crypto becomes intertwined with TradFi that a wider range of market data will be required for all participating firms,” said Mercer.
Costs for crypto trading firms may also rise as they start requiring more mainstream tools to execute trades or other related services. Demand is growing for cross-asset trading software such as portfolio or risk management systems, technology companies and fund managers said.
Digital Asset order management system provider Talos has seen demand for its products including data spike over the last 6 months, said Chief Executive Anton Katz. Sell-side vendors are looking to provide their clients with the ability to price and trade currencies and crypto simultaneously to improve execution outcomes, he said. Buy-side crypto traders, such as hedge funds, are looking at new areas, where input from other markets is key.
The pressure to substantially increase costs comes at a time when the prices of crypto assets have slumped, further impacting the profitability of digital asset specialists. Market makers in crypto are also facing stiff competition from companies with roots in traditional finance, with firms including large players like hedge fund Brevan Howard and market maker Citadel Securities entering this space. These companies already have information and links to equities and commodities trading, which potentially provide an edge over those that do without additional data.
For now, some are hoping they can still hold off on a data shopping spree.
“If I wanted CME data that’s a significant lift for me financially,” said Michael Safai, a founding partner at crypto trading firm Dexterity Capital. “For the time being it’s not attractive but in the long run we will have to think about it. It’s only going one way.”
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