Large Dutch speed trading firm, Flow Traders NV, are expanding their high frequency trading techniques of exchange traded instruments into crypto assets.
Flow Traders is part of a breed of institutional investors who focus on using computer algorithms and models to perform large volumes of trades very quickly.
The company has specialized in the use of deterministic models to minimize the risk of high frequency trading to become the largest trader of exchange traded funds (ETFs) in Europe. Last year it also began to broaden trading into currencies by establishing its practices to foreign exchange markets.
Publicly Traded Crypto-backed Financial Instruments available in Europe
The move into crypto assets by Flow Traders is thanks in large part to the availability of publicly traded exchange traded notes (ETNs) of both bitcoin and ethereum in Europe.
Exchange traded notes are a financial instrument — a debt-based security used to track performance of a market index minus applicable fees similar to ETFs. The provider of these instruments to Flow Traders according to the Bloomberg article appears to be XBT Provider, who list bitcoin and ethereum ETNs on the Nasdaq Stockholm exchange and are owned by CoinShares Ltd., a company based in London. XBT Provider told Bloomberg that Flow Traders has “dramatically increased” trading of the crypto-backed products recently.
Hedging the Bets
ETNs aren’t the only instrument that XBT is exploring in the crypto space. Dijkstra also told Bloomberg that the company was also “hedging its trades of crypto notes with futures contracts run by CME Group Inc. and Cboe Global Markets Inc.”
The CME and Cboe futures are designed to provide investors exposure to the price of bitcoin without holding bitcoin itself. They also allow for more advanced trading techniques that are likely key to FlowTraders use of them in their trading model.
The move into crypto assets by the Dutch firm could also be related to its newly established currency trading. Dijkstra told Bloomberg that making markets in crypto has had “big spillover benefits” in their foreign-exchange trading business.
The benefits to the currency business could be related to the the fact that the XBT Provider have ETNs denominated in both Swedish Krona and Euros allowing FlowTrader another lever to utilize in currency and crypto trades.
But the most likely reason behind the move of this large speed trader into crypto is to expand its overall market. More and more institutions have begun to adopt algorithmic and model based trading strategies similar to those that Flow Traders employs and overall interest in the company’s core ETF business may be languishing.
At the time of the company’s move into currency trading, Bloomberg indicated that the firm was making only 0.028% per trade. Surely, given the volatility of crypto markets and Flow Traders’ ability to leverage publicly traded assets against their foreign exchange business the leap into crypto is an attempt to improve that margin.
Institutions Moving into Crypto Despite Recent Sell Offs
The timing of the move and announcement is interesting as crypto markets have been taking a beating recently with bitcoin falling over 50% year to date. But what the big money players seem to be seeing is the longer term prospects for crypto assets.
Both bitcoin and ethereum are up year over year. The large financial institutions are placing their bets that as regulations continue to evolve and the industry surrounding cryptocurrency matures, there’s still room for these assets to gain more users and value over time.