Deribit Chief Commercial Officer, Paradigm CEO, GSR Investment Solutions Director, CryptoProp co-founder and other crypto derivatives experts talked about market dynamics and market maker mechanism.
Since 2019, the cryptocurrency derivatives market has been developing rapidly. Today , the daily trading volume of bitcoin futures has reached tens of billions of dollars , becoming an important part of the cryptocurrency market.
At 8 pm on August 27th, Beijing time, the third phase of Crypto Tonight’s new series of D-Hour, we have a deep dive into the crypto derivatives market together with the chief commercial officer of option trading giant Deribit and the CEO of Paradigm .
Core Aspects of This Issue
- Chief Commercial Officer of Deribit: Deribit launches market maker protection MMP solution to design a multi-level order book
- Paradigm CEO: Chinese miners promote the growth of Bitcoin options market
- Head of GSR Investment Solutions: Benchmark liquidity on the market is critical to the development of cryptocurrency options
- Co-founder of CryptoProp: The crypto market is growing fast, with high volatility, and has greater opportunities than traditional asset markets
Guests of this episode
- Luuk Strijers, Chief Commercial Officer, Deribit
- Anand Gomes, CEO of Paradigm
- Jakob Palmstierna, Head of Investment Solutions, GSR
- Tobias Abbey, co-founder of CryptoProp
To view the complete program video, you can click here to review it. The following is a transcript of the entire program of this issue, with some editing.
Guest introduction
Good morning, good afternoon, good evening and good midnight, everyone! Welcome to Crypto Tonight. D hour-Deribit Hour, episode three, deep exploration of crypto derivatives, part two.
I am Yama and I am very happy to host tonight’s show. First, please join me in welcoming the four guests tonight. They are: Luuk, Chief Commercial Officer of Deribit, Anand, Founder and CEO of Paradigm, Jakob, Head of Investment Solutions, GSR, and Tobias from CryptoProp. Welcome everyone!
First of all, please make a brief introduction. Share their background. Including what do you do, what does your company do?
Let’s start with Luuk. I know this is your third visit to Crypto Tonight. Maybe you can introduce something different today.
Luuk: Most viewers already know us well. We are Deribit, a giant in the crypto derivatives trading platform, and the largest exchange in the crypto options market. We have a 90% market share.
As for myself, my name is Luuk, I live in Holland and I am Dutch. I am responsible for managing all business relationships with external parties, including customers who bring us cash flow, as well as partners. My daily work includes discussing new products, costs, new solutions and product design.
Yama: Thank you for telling us that you are Dutch (hahaha). Thank you. In fact, many people tend to confuse the chief operating officer (COO) with the chief commercial officer (CCO). Please share with us how your day usually goes?
Luuk: My day is the same as I mentioned before, with a lot of customer contacts. We are operating 24 hours a day, 7 days a week. So I wake up every morning and I have already received a message from Anand. (Laughs) There are many other customers’ comments. We need to constantly solve problems and constantly find solutions based on customer requests. We will discuss new ideas for products or cooperation with customers. There are also many video conferences like this, as well as Zoom communication with potential customers. These customers come from all corners of the world and are located in different jurisdictions. Their questions are mainly about account opening, how to connect, etc., but some will also ask about our future plans. In a nutshell, I have to maintain existing customer relationships, but also establish and strengthen new customer relationships.
Yama: Thank you Luuk. I have Anand next. Anand, welcome you again.
Anand: Hi everyone, my name is Anand, and I am the CEO and co-founder of Paradigm. Paradigm is a block trading platform for crypto options and futures. We are the first block trading platform integrated with Deribit, and now we are integrating with more exchanges. We have integrated with CME Group (CME) and recently integrated with bit.com. We mainly serve institutional clients. Institutional clients need more large-scale liquidity, so when the market lacks liquidity, they can usually negotiate directly with market makers in a peer-to-peer environment to obtain liquidity, and our platform can help them achieve this goal.
Yama: Thank you. Paradigm has many exciting news. You have also recently completed a round of financing, and new exchanges are constantly entering the platform. Congratulations! Here is Jakob from GSR.
Jakob: I’m Jakob, one of the partners of GSR. We are a financial services organization that focuses on programmatic trading of digital assets. From the encryption field that this show focuses on, we are also one of the largest options and structured product market makers in the global digital asset field.
Yama: Thank you, Jakob. Next up is Tobias from CryptoProp.
Tobias: Hello everyone, my name is Tobias, one of the founders of CryptoProp. CryptoProp is a partnership jointly established by many founders and Propex Derivatives. Propex Derivatives is a proprietary trading company based in Sydney. It mainly trades financial products in traditional markets, including stocks, bonds, commodities, etc., while CryptoProp focuses on crypto trading . What we do is directional trading, mainly focusing on futures and futures spread trading. However, we also provide liquidity to institutional clients through block trading platforms such as Paradigm, and we are slowly entering the field of option trading. This is a new attempt for us and a new direction we are exploring in the past 3 to 6 months.
Talk about options and futures trading in the cryptocurrency field
Yama: Thank you everyone. Let’s move on to the first topic of tonight-options and futures trading in the cryptocurrency field. First please share with us Luuk.
Luuk: I think cryptocurrency options and futures have achieved tremendous growth, which is obvious to all. Deribit is particularly impressed. Our options business has achieved significant growth and new transaction records are set every month. We are also quite satisfied with our achievements. Although there are constantly new competitors entering this field, the actual situation is not as many people think. In fact, our trading volume not only did not fall, but rose because of it. The cash flow attracted by many new entrants is actually hedged by Deribit. Therefore, in general, I think there is more room for growth in the future. In the field of encryption, people have different views on the growth prospects, some say 10 times, some say 100 times, and there are different opinions. But I personally think that growth has just begun.
From the perspective of new entrants, companies present here, and companies that are entering this field, especially option trading companies, I believe that there will be new highs at the end of this year and in the future.
Yama: I know that GSR started trading cryptocurrencies very early. Jakob, please share your opinion with us, okay?
Jakob: Yes, I certainly agree with Luuk’s view that options trading has seen tremendous growth. I read from the news that in just a few months this year, the holdings of BTC options have doubled by 6 times. Over the years, GSR has been looking forward to the growth of derivatives trading and options trading, because this growth can bring us development opportunities, so that we can use our infrastructure to build together with Deribit, an exchange with good liquidity Structured products. Due to this growth, we have been able to launch a large number of different structured product strategies to provide institutional clients with a richer financial solution. I believe that it is important to pay attention to the liquidity provided by Deribit and supported by Paradigm, but it is important to keep in mind that good on-market benchmark liquidity can support the rapid development of the off-market customized derivatives market.
Yama: Tobias, as an experienced options and futures trader, do you have anything to add?
Tobias: There are many reasons why we entered the crypto field-first, the crypto field is in a rapid growth cycle; second, the high volatility of cryptocurrency provides many investment opportunities. Even from the recent market dynamics, volatility has rebounded and it is driven by some DeFi measures. By observing the development of the options market and related opportunities, we can find that not long ago, the volatility of ETH was lower than that of BTC, which is quite anomalous because ETH itself is an asset with a higher β coefficient than BTC. So I think the opportunities we can provide for ourselves and our customers are much better than those in the traditional asset market, and the opportunities in the field of digital assets are also more attractive.
Yama: I think that in the past year, the growth rate of options is undoubtedly very fast. And I also think that Chinese miners, and all companies with a mining background, must have made a great contribution to its growth. So Anand, from your point of view, as market participants change, why does market competition result in a win-win situation?
Anand: As Jakob said, in the past few years, the infrastructure to provide structured products has been quite mature, and liquidity can be provided on demand. Without this precondition, it is obviously impossible to build a level 2 market product or a three-tier structure product. According to Tobias, the world is full of cash, and investors are indeed looking for income. Undoubtedly, Chinese miners in particular have promoted the growth of options, but they have also caused many investors to blindly pursue profits and ignore risks. Just like GSR, which is constantly fighting in the field of family wealth management, BTC has finally obtained the status of a legal asset class and can participate in asset allocation. It has existed for some time, has not been eliminated by the market, and the yield is still attractive, which attracts more investors. People generally refer to cryptocurrency as an asset, while celebrities in the traditional financial world call it an excellent asset class. If you don’t invest in it, you will miss opportunities. Therefore, it has many features in one, but all of them are powering the growth of the crypto market.
Jakob: Let me add that from the investment needs of our institutional clients, we can see that the increased liquidity of European options on the market has brought greater confidence to these institutional investors in digital assets, enabling them to focus on this new asset class Design a more precise income structure to control risk exposure. They can absorb many opinions and design many venture capital products, but they are also very confident in the pricing of options, because they can see that the depth of option products on the exchange is getting better and better. In addition, we can now not only price BTC and ETH options on this basis, but also create over-the-counter options markets and volatility surfaces for most small currencies with better liquidity. Back to the topic of miners, sometimes they prefer to have continuous-priced Asian average price options, because their electricity costs are not only paid on the delivery day, but need to be settled every day and every week. We can design many solutions to this demand, but in the end, we rely on benchmark liquidity in the market. This is very encouraging, and I think it is essential to the development of the entire asset class.
Anand: To add, the popularity of trading tools is another major reason for the growth of the market. We believe that Paradigm has accelerated the growth of the options market by providing traders with the ability to tailor strategies based on their risks and investment status. This is what Paradigm provides-to develop any strategy for the product you choose, and to hand it over to multiple market makers for pricing. This was impossible before. Therefore, it is also a combination of multiple factors that has boosted the growth of the market.
Yama — Tobias, please share your views and experience on trading options, okay?
Tobias: Many digital strategies are usually quite directional. During my last job and working in crypto trading, I was very optimistic about delta 1 products and tried to choose a direction. However, its scalability is not as good as some more quantitative strategies. Therefore, we have done a lot of basis trading and traded expiring products on Deribit quite frequently. By trading products with different maturities and iterative products of those products, we can quickly obtain a full position margin. When it comes to options, we go into battle with various strategies-directional trading, through market making in the over-the-counter market to obtain a certain scale of positions, and improve the perception of the market.
When I entered the options field, the volatility fluctuated sharply, but I think this situation has been reversed, because by participating in this field, I have learned that many investors blindly chase returns. I thought this phenomenon will appear later, but the crypto field This kind of profit-seeking psychology is more serious than traditional markets. Therefore, buying volatility and expressing your views on market trends through the rise and fall of options have indeed brought us some very good opportunities.
Yama: Can you also explain, what are the factors that promote the improvement of market makers’ quotation ability in various markets?
Tobias: I think it is mainly the structure of the existing order book. Obviously, if you have positions and want to turn them over and invest in the opposite direction, then you can provide greater scale and higher liquidity. We have found that in many cases, if we take away all the liquidity in a particular direction, it is often difficult to find other opportunities. This depends on the current situation of the order book and also on the system liquidity situation in the market.
Yama: Deribit launched MMP (Market Maker Protection), Luuk, can you share with us about this?
Luuk: Yes, MMP is short for Market Maker Protection, which is also one of the ways we provide better products to the market. Compared with other personal investor trading platforms, some of our products are mainly aimed at institutional customers. Our clients are smaller, but more mature and active than some other investors. 80-85% of our transaction volume comes from institutional clients, and 20-15% of our transaction volume comes from individual investors. In order to attract these institutional clients, we need to design a suitable interface-quotations with smaller spreads, order books with better liquidity, etc. To achieve this goal, a large number of market makers are needed. Therefore, we have just launched MMP, which is a solution that designs the order book to have multiple levels, and if there are any problems, we will immediately manage it manually. This is a very powerful solution. By comparing the market before and after the launch of this solution, it can be seen that several market makers have more multi-layer quotations than before.
Therefore, when you want to trade larger options, you should not just look at the best price. You can use Paradigm or our order book, but they need to have a certain minimum order quantity limit. These are the areas we strive to improve. If you compare us with traditional markets, you will find that these solutions have a long history. Therefore, I am not saying that we have reached the standard of traditional exchanges, but Deribit is one of the most advanced exchanges in the crypto space. We have also introduced a combination margin, which has been mentioned many times before. This is what makes us different. Therefore, we continue to innovate in this direction, introduce new features, and maintain our advanced position.
Yama: What are the reasons for pushing market makers to provide better quotations?
Anand: In a nutshell, what market makers want is certainty. As Luuk said, MMP is one of such measures. However, if the MM (market maker) wants to provide a smaller spread, you must provide as much certainty as possible, because the higher the uncertainty, the larger the spread.
However, from the point of view of a single-party, there are more platforms outside, and each platform wants to compete by emphasizing its own advantages. But the overall idea is that if you take away certainty and lower the barriers to entry, you can ensure that more participants enter, the spread will be smaller, the market’s liquidity will increase, and the overall market will rise.
Yama: Luuk, what do you think?
Luuk: This is an evolutionary process. If you look at the quality of the order book and the number of available products, look at our products and customer requirements-more customers want us to expand our product range. If we have enough market makers, we can. A year ago, we were afraid purely because of the risks involved. Even if the market today is good, if a crash occurs, market makers may not be there. But now we have proven that they will be there. Maybe the price difference of the quotation will be a bit larger, but we can prove that the market quality is enough for us to expand. This is what we are doing. And the system must also be able to cope with this. The market maker must be able to update a thousand prices at the same time. Therefore, all our systems must be able to handle this kind of traffic. Therefore, many innovations are not even visible to you, because they are designed to improve platform performance and support future growth.
Anand: We are experiencing similar problems because we are trying to fully automate the process. This is a completely new situation. Our goal is to achieve a 100-fold increase in transaction volume, and our system must be prepared for this. We are also simplifying the process for our customers as much as possible to avoid complexity. Our company will launch the API within 6 weeks. As a platform with multiple exchanges, we must consider the differences between all contracts and infrastructure to provide a consistent user experience. People tend to ignore this. But in the final analysis, we did this because we believed it would drive growth.
Jakob: I am very glad to hear that the guests involved in options and derivatives trading share the same growth experience, which is quite fascinating. We all believe that the robustness and performance of the cooperative trading technology platform is crucial. It is worth noting that if the transaction volume may increase by 6 times, then the throughput may increase exponentially, so it is very important to maintain this enterprise-level technology. Speaking of quantitative strategies, current trading strategies include technical CTA strategies-directional strategy or mean reversion strategy, order-taking microstructure strategy and pending order market-making strategy.
The complexity of the option market making strategy is much higher than that of the spot, because you have to find equivalent pricing on different surfaces-you have products with different expiration dates and exercise prices, so you must control risks while making the market ——The risk sensitivity coefficient of the second-order and third-order Greek letters. We at GSR are very excited about this, because as a quantitative trading agency, where there are challenges, there are opportunities. But the risk of making a market on options is much higher than on any other product. As Luuk and Anand said, the more robust the exchange infrastructure, the greater the trading volume. More and more trading institutions in the cryptocurrency field dare to take this step and start to provide stable liquidity on the option trading platform.
How is crypto option trading different from traditional option trading?
Yama: In your opinion, what is the difference between traditional option trading and crypto option trading on Deribit?
Tobias: One of the differences is that the barriers to entry are lower. Deribit has now moved to the LD4 data center, so if you want to set up an automated trading strategy, you can have a very level playing field, and the cost is not high. We found that this is a good way to test trading strategies. Deribit itself provides a level playing field. I think it is impossible for traders to have such an environment in the traditional market dominated by established companies and investment banks. We really like this, and it also attracts many new people to join, which is very meaningful. We can see crypto derivatives traders who cannot be seen in traditional markets.
Jakob: I agree with Tobias’s point of view. The traditional market is dominated by big coffees, and it is cost, latency, and infrastructure. Just copying these elements is very expensive. In addition, the total number of US wholesale market maker options positions can easily reach 250,000, and interest rates are very low. Even emerging companies like GSR are difficult to compete with. Although our number of employees is rapidly increasing from 40 to 100, it is still insignificant in the traditional market. However, with the experience of the traditional market, coupled with a period of intensive cultivation in the field of encryption, it has indeed opened up a new path for us.
Luuk: Each has its own merits. I used to work at the Singapore Stock Exchange. For all of our 1,000 people, it takes 6 months to initiate a new option contract, involves multiple testing phases, and also tests the market maker’s quotation capabilities. Compared with the encryption field, we pursue rapid innovation; we have hot fixes to ensure that the system does not stop; we will not make a special trip to test on Saturday morning. Everything runs faster, and market makers must be prepared. On the other hand, the traditional market has been developed for a long time and can provide technology that does not yet exist in the encryption field. But we believe that in a few years, we can do it too. We are one of the fastest cryptocurrency exchanges. If you have a cross-connection with our LD4 data center server, the round-trip order only takes 1 millisecond. Although this is still incomparable with the nanosecond of the traditional market, we fight It’s not speed, because traders are not yet ready. When the number of option exchanges increases to 10, we may consider it.
Yama: What is the difference between API connection and traditional trading on a cryptocurrency exchange?
Anand: In the field of encryption, protocol specifications such as WebSocket and RESTful are more popular than FIX. FIX is just an additional supplementary specification and has not been adopted initially. The traditional market is different. FIX has been launched for a long time, it is more mature, and people are very satisfied with it. If you innovate, people will not like it. In the field of encryption, these new technologies are easier to accept. In fact, we investigated customer preferences, including their data type preferences, API preferences, and how often they want to update their quotes. And our biggest discovery is that almost no one likes FIX. Obviously, this is just an example, and there are many subtle differences between the encryption field and the traditional field.
Tobias: We are more accustomed to connecting with traditional markets, so we use FIX more, exchanges have different nuances, and their APIs are also different. Open buy and close sell are some of the characteristics of Asian exchanges, and it takes time to adapt. Fortunately for Deribit, we have a wealth of FIX experience, which helped us speed up the process. However, there are still many in-depth differences between the traditional market and the encrypted market, so we have more opportunities to study and solve them.
Luuk: From the perspective of the most traded product-perpetual contracts (rather than options), the most active traders are HFT companies from the traditional market, and they all use FIX to trade and access 10 companies with the same agreement Different exchanges allow them to trade in multiple markets in just a few weeks. About 50% of our leading market makers in the options field also use FIX. In addition, the biggest difference between the traditional market and the encryption market in terms of agreement is cost. In the traditional market, each API charges thousands of dollars a month for each connection. If you want to use 10 connections to avoid latency problems, the price will be very expensive.
Anand: Another difference is the question of whether market data is charged. In the traditional market, all data is charged; in the encrypted market, all data is available for free. And I believe this will not change, because it is easier to open an encrypted account, traders can get all the data, test their strategies, and enter the market more easily. In the traditional market, only setup costs will continue to increase. However, these costs do not exist in the encrypted market and will not be introduced in a short time.
Jakob: In the traditional financial field, you will buy data sets in databases such as Worldscope, and then you can safely build strategies on these data sets. In the field of encryption, you need to collect data yourself, because you need to accurately know the tradable price and the amount of transactions in the market. These data become the core assets of your transaction. As the saying goes, bad use of data is trash in and out. We talked about making your exchange unique by implementing better data integration, and I think this discussion is meaningful. I think we are gradually connecting exchanges in a standardized way. This is the only way for the market to mature. Trading platforms that cannot keep up will be eliminated by the market. As for data collection, we like to do it ourselves. And we believe that this process is difficult to replicate.
Why do options trading institutions love Deribit?
Yama: Because our show is called D-hour, my last question is: Why choose to trade on Deribit?
Tobias: We chose Deribit because they provide a trading experience similar to the traditional market. We can directly talk to the development team and get a response within a few minutes. Deribit also has another professional ability that we like and rely on, namely the reliability of the system and engine, which allows us to continue trading with confidence. This is exactly what we need and can help us avoid the collapse of the exchange system and place orders. Unsuccessful or uncontrollable risks and other factors bring us uncertainty.
Jakob: Mainly Luuk’s charm, but mainly Deribit has become the market leader and has occupied a dominant position in the options market. We are a large options market maker. Deribit provides a robust platform for trading futures and derivatives, coupled with professional services, good connectivity, and guarantees the reliability, robustness and performance of our transactions. Deribit provides all of this, very rare.
Anand: I agree with all the reasons mentioned above. Obviously, there is infrastructure, but in the final analysis, liquidity is the most critical. The reason why people trade on a certain platform is because they can get it when they need liquidity. Then you can design features around it. In terms of liquidity, Deribit is still number one. But Deribit’s advantage is that it is not only professional in products, but also provides good customer service. Of course, it has also made a lot of efforts to increase the ease of access to liquidity-infrastructure, cross-connections in LD4, large transactions and taking the lead in encouraging institutional liquidity.
Yama: Luuk, are you satisfied with these answers?
Luuk: Exactly. I think we are following a niche strategy, not a diversification strategy. So we focus on polishing our niche products instead of launching 100 different products. We do not intend to significantly broaden the scope of services. We hope to continue to further develop niche products. We hope to introduce VIX, the purpose is to expand option products, rather than develop other products. We focus on institutional clients, which means we have specialized hardware, which other exchanges do not have. Next week, our test environment will be moved to Zurich, where it will be used as a backup facility, which is not available on other exchanges. Of course, we hope we never have to use it, but be prepared. MMP is just one of many innovative features. This is still our main goal and has attracted more users. We are also seeing more and more exchanges entering the market, and the market provides encryption generation services to help them hedge risks on our exchange.
Yama: Let me summarize the five reasons why I chose to trade on Deribit:
- The number of options holdings ranks first in the market;
- Provide products such as futures, perpetual contracts and options;
- No need to worry about hacker attacks and social losses;
- No internal market making behavior;
- Provide combination margin.
Thank you for your time!
