Dark pool and OTC crypto trading growing as market begins to resemble traditional asset classes

Aite Group report finds OTC market accounted for 60% of all cryptocurrency trades in 2018, expected share to grow to 65% in 2019.

New research has shown a growing percentage of crypto trades being executed via the OTC market and dark pools in a sign of the asset class maturing as it continues to evolve.

The report from Aite Group shows that the OTC market accounted for 60% of all cryptocurrency trades in 2018 and expects the share to grow to 65% in 2019. These numbers show a significant increase from 2016 where OTC activity accounted for 32% of trades.

The emergence of dark pool trading in cryptocurrencies is also evident, with an estimated 8% of volumes transacting through the venues in 2019, up from 5% in 2017 and non-existent levels in 2014.

The author of the report highlighted how this trend, along with narrowing spreads and opportunities for simple linear arbitrage vanishing, point to the market maturing and resembling one in traditional asset classes.

He did, however, add that the developments are increasing complexity in the market.

“The growing prevalence of OTC trading desks and dark pools, while beneficial to institutional market participants who wish to trade block-sized orders, has made the overall trading landscape even more complex and difficult to navigate,” said Gabriel Wang, analyst at Aite Group.

“Cryptocurrency market participants, particularly those coming from the traditional finance world, are usually not accustomed to having to interact directly with hundreds of trading venues to get their trades executed, and to manage their account relationship and profit and loss (P&L) across those venues.”

The report is based on qualitative interviews with executives from cryptocurrency exchanges, cryptocurrency OTC trading firms, dark pools, and buy-side firms trading cryptocurrency instruments carried out from January 2019 to March 2019.

As a result of the evolution of dark pools and OTC trading, the percentage of volumes executed on lit exchanges continues to decline despite a growing number of platforms.

Wang noted that the proliferation of various types of trading venues has resulted in dramatic market structure changes in the cryptocurrencies market, with market prices and efficiency improving by the day.

Speaking with technology vendors, Aite added that market access, smart order routing (SOR), and algorithmic trade execution are three of the must-have capabilities for these platforms, and solution providers to differentiate themselves in value-added areas, such as transaction cost analysis (TCA) capabilities, risk management, compliance and reporting, and integration with post-trade service providers.

“Market participants are in desperate need for institutional-grade tools to help them achieve reliable trade execution with a better understanding of their transaction costs, efficient allocation and position management, risk management, and compliance and reporting goals,” said Wang.

“One of the infrastructure pieces that has been built to better serve the fundamental needs of institutional market participants is institutional-grade electronic cryptocurrency trading platforms, aimed to help market participants better navigate the cryptocurrency trading landscape and achieve better trade execution.”

On the topic of institutional uptake, the report noted that market makers, high frequency trading firms and crypto hedge funds remain active in the market while traditional asset managers continue to wait on the side lines.