The institutional market participant is significantly underserved in crypto markets compared to traditional markets particularly from a market infrastructure perspective, according to David Wells, CEO of Enclave Markets.
“Growing institutional adoption of crypto as an asset class has led to the opportunity to serve this customer segment with products that have a proven model in traditional markets, like a Crossing Network, but with infrastructure and settlement improvements offered by distributed technologies,” he told Traders Magazine.
On September 8, Enclave Markets, an institutional-grade digital asset trading platform, announced the launch of Enclave Cross, a novel service that allows participants to trade blocks of digital assets at the given market price without any information leakage or market impact.
Enclave Cross has begun early-stage production testing with select institutional trading firms and prime brokers including Hidden Road Partners, LedgerPrime, Republic Crypto, Fir Tree Partners, Scrypt, FBG Capital, and Blizzard Fund, among others.
Enclave Cross enables approved participants to execute block trades in a fully private and secure manner.
Wells said that similar to the development of traditional markets, there are now large buy-side institutions that are seeking marketplaces to be able to move into and out of positions without suffering from market inefficiencies such as information leakage, strategy signaling and market impact.
“Asset managers are seeking solutions to rebalance their large portfolios without paying the high transaction costs of using existing solutions in crypto marketplaces, where the liquidity is highly fragmented across various centralized and decentralized trading platforms,” he said.
Enclave Cross leverages a novel hardware technology called Secure Enclaves, which cryptographically guarantees the integrity of the code base that autonomously runs the trading platform, Wells explained.
“This Secure Enclave relies on a group of trusted third parties to secure the trading platform and approve any changes in a consensus mechanism,” he said.
The end result is that no market participant or the platform operator can have preferential access or any kind of information advantage over any other participant, he added.
“This model guarantees the integrity, privacy and security of the marketplace all within a compliant liquidity pool,” Wells said.
Today there are two models of crypto exchanges – Centralized exchanges and Decentralized markets.
Wells said that Centralized exchanges are efficient, but rely on the exchange operator as a trusted central party to not conduct any practices that would be unfair to its users, such as “rehypothicating user assets similar to what we saw earlier this year”.
Decentralized markets address this single-point of failure issue, but suffer from issues related to non-private order flow, difficult to scale throughput for institutional traders, and some on-chain market manipulation practices such as MEV, which is a form a front-running, he said.
According to Wells, due to the fragmented nature of crypto liquidity, large orders on a single order book tend to move prices in a more amplified way in crypto.
“Additionally, current crypto trading venues have historically been retail focused, where most liquidity sits near the top of the order book,” he said.
Wells further said that institutions with large orders require greater depth in the order book that requires work-around solutions such as order-routing and execution algos such as TWAP or VWAP, but this only partially mitigates the market impact and can even be reverse engineered by other market participant trading algos.
Wells said that the main gaps in the crypto market for institutions are related to the lack of protections that guarantee market integrity, privacy and security.
“Additionally, today’s trading venues are retail-first, meaning they look more like a retail brokerage versus what’s offered in traditional markets such as more sophisticated marketplaces and price discovery mechanisms like a Crossing Network or Alternative Trading System,” he said.
