Spectrum Markets
Michael Hall talks to Jenna Lomax about what Spectrum Markets can offer the retail trading space, how the relationship between digital and traditional assets will continue to change, and if crypto derivatives should be monitored as part of ESG policy
What should investors be aware of when it comes to protection from financial market instability, particularly at this moment in time, given the current geopolitical landscape?
If the last couple of years are anything to go by, we have seen a lot of volatility, and it is continuing as we speak — it is becoming the norm and is something we can’t control. However, if we look at instability in the market, that is definitely something that can be addressed and that Spectrum aims to reduce as a venue — it is what we focus on.
There has been a lot of progress in regulation and regulatory frameworks. MiFID II, MiFIR and other trading rules stipulate different pre- and post-trade transparency requirements, and require ongoing consultations which keep developments fresh. This, to an extent, dictates how stable the trading environment can be.
On the other side of regulation is technology, which plays a huge part in the instability topic.
Some industry participants’ technology is built on legacy systems, which can lead to trading halts and operational issues in periods of volatility, such as the COVID-19 pandemic. However, Spectrum is a brand new technology designed on a bespoke proprietary system.
Combining good technology with a good regulatory framework is something that financial institutions can manage — ensuring that there is a robust environment for trading to happen when there are times of volatility.
It is about ensuring that your technology is ready for any volatile market, and that there is scalability, resilience and capacity to be able to adapt. There are, of course, ongoing consultations and new regulatory frameworks being published that will ensure that there are parameters to create a robust environment for financial markets.
Can crypto derivatives always be considered as a safer way for new buy-side participants to get access to an asset class?
There are definitely risks with trading all products, however there are a lot of benefits to trading exchange traded derivatives. Turbo Warrants listed on Spectrum Markets (Spectrum), for example, have a lot of benefits. The product is on venue, so users have pre-trade controls, pre- and post-trade transparency, and many other on-venue benefits that come with trading products in this way.
Within the product itself, users can choose a predetermined ‘knockout level’ of the product. For example, if you were to buy the physical underlying of the crypto or share, and the value of that asset were to go down to zero, you would lose your investment down to zero. Unless you are sitting by a computer all day, you cannot really determine when you want to pull out of that trade — different order types can help, but in some instances there are no guarantees if the market falls too quickly.
Therefore, what Turbos allow you to do is choose a predetermined maximum loss on a trade — this can be set going into the trade, and users can access its movement remotely. If there are market movements against a user, they have entered the trade knowing their maximum loss.
On a derivative, you can take a long or a short position — you can either use the short position just for hedging purposes, or you can use it to benefit from a fall in price. It complements your trading strategy, depending on what you are looking to impose on the markets.
When considering the trading of derivatives in the post-trade environment, there is a lot of new technology jargon within the crypto world that people are still getting used to.
However, if you look at how traditional derivatives and crypto derivatives are settled and held as custody, that is actioned through the utilisation of an infrastructure that has been around for decades — it fits into the same mold.
There are definitely benefits to having a system that is more familiar with traditional post-trade processes. Broadly speaking, there are benefits, but it is about providing choice on your strategy.
Do you think the COVID-19 pandemic necessitated a rise in the use of crypto derivatives? What did you see?
We launched just before the pandemic, in 2019. Spectrum’s launch was coupled with an increase in overall trading across the board — not just at Spectrum. This gave rise to existing traders, who potentially wanted to look at their portfolios and reanalyse where they wanted to invest for the longer term. COVID-19 did create volatility, and therefore opportunity, in the market.
There was a lot of room, a lot of different kinds of products entering into the market. We did not offer cryptos at the start of the pandemic, but we have recently started to offer them, which is a result of significant demand from our clients.
Spectrum talks directly to the broker, which is our client, and they are the ones closest to the retail client — their clients. Interacting with them, getting that feedback over the last year or so, has allowed us to create a product that is very specific to their needs. We wanted to wait to offer crypto to make sure that we had the right products in line with their feedback.
When a broker connects to Spectrum they naturally consume our market data for all asset classes and underlyings.
Adding a crypto derivative to that offering is no different; it is the same product, the same settlement, and the same connection — it fits within an existing framework that they are familiar with. Equally, the client is used to trading on their portal. Therefore, there is demand from the brokers themselves on those products.
Do you think digital assets will continue to sit alongside traditional assets, or will they become more ingrained within them as the norm?
There is definitely a demand and a directional trend that is becoming more popular around digital assets — not just crypto. We are yet to see what there will be a digital representation of, in terms of an asset, and what the actual use cases will be in the real world.
There is a lot of encryption and blockchain technology that exists, but how applicable is that to the real world currently? It is still in its infancy.
It will become more mainstream, but it is about getting clearer, transparent, internationally recognised regulation — a framework that is able to cater for that product, whatever it may be, in whichever form it may take.
In the meantime, what Spectrum is trying to offer is access to a new and popular product within an existing framework that we know is secure, and that caters for the demands of today.
We have a service called intraday issuance which allows issuers on Spectrum to react to market movements and offer flexibility around consumer demand.
Spectrum is the first of its kind to introduce this feature simultaneously across multiple European countries. Previously, investors outside of Germany and Switzerland had to wait until the next day for new securities to become available again, which can be very frustrating — that is not a great experience for a client. We recognised this, and worked with our issuers and our technology to establish an algorithm that notices when there is a gap in the market. We look to create new products that clients can then trade with.
Should crypto derivatives be monitored as part of ESG policies? What are you seeing, what has been your experience?
As with any asset class in trading, there is a link to ESG topics. They are becoming more relevant in trading. Focusing on the ‘environmental’ part, there is progress being made with Etherium at the moment, which will, very shortly, change from proof-of-work to proof-of-stake. In the past, there was a huge amount of energy required for proof-of-work, and reducing that to proof-of-stake in the future will be a more environmentally friendly way of minting coins.
The ‘governance’ part of ESG is the part a lot of people forget. Moving forward, there is definitely a need for wider regulation, and it needs to be internationally recognised on the crypto itself. At the end of the day, the investor makes their own decision. We are there to provide tools for them to access, but it is up to them to invest where they see fit.
Do you have any predictions for the future of crypto derivatives?
Looking at the crypto market, its adoption is becoming increasingly popular. There are many articles and many charts that show how familiar it is with other asset classes — how many clients have actually traded it versus equities. The more regulation that is put in place, the easier it will be to create a simpler tool for people to trade.
Crypto will become a general asset class that forms part of any portfolio, much like equities, foreign exchange or commodities. There will be a segment for digital assets and more interest from retail investors, given the current demand. There will be more financial institutions that want to cater for that demand, including Spectrum.
