Fireside Friday with… Matrixport’s Omid Zadeh and Toby Norfolk-Thompson

The TRADE sits down with Toby Norfolk-Thompson, chief investment officer (US & UK) and Omid Zadeh, head of prime sales at digital asset prime broker Matrixport, to discuss the future of institutional crypto trading – where are we now, where are we headed, and what needs to change?  

Toby Norfolk-Thompson, Matrixport

First things first – for those who don’t know, who are you and what do you do?  

Norfolk-Thompson: Matrixport is a full-service digital assets prime broker, which was spun out of BitMain (the world’s largest Bitcoin mining hardware manufacturer) in 2018 by founder Jihan Wu, and reached unicorn status in August 2021. Now we’re looking to drive forward our institutional prime financing and collateralised lending activities, and to support our hedge fund and family office clients. As well as prime financing we also invest in funds directly, we have a fund accelerator program, and we’ve been building out that function in the UK and the US recently. 

How do you see the institutional crypto space developing, in terms of both the attitudes and the access of institutional investors towards digital assets?  

Zadeh: What we’re finding is more and more names and more partnership deals coming into frame. That’s creating a sense of FOMO at C suite-level – when other asset managers are seeing BlackRock do a deal with Coinbase, for example, that spurs on a lot of activity with C-level saying OK, we need to be getting involved with that asset class as well. We’re now seeing that FOMO trickle down, so more and more asset managers are starting to strike deals. Just a few days ago we saw BNY Mellon launch a new digital asset custody offering, which will spur on a lot of their clients, out of a very large customer base, to look more closely at digital assets. We’re seeing a high level of hiring of new heads of digital assets at asset managers, trying to get in on this game.  

In terms of actually getting down into real nitty gritty of trading these things? That’s probably going to be 2023/24 phenomenon.

In terms of actually getting down into real nitty gritty of trading these things? That’s probably going to be a 2023/24 phenomenon. But the fact that those wheels are now turning, those hires are now being made, suggests that it’s definitely on the way and there are clear strategies for digital assets to generate revenues, it’s being placed into the three-year plans of pension funds and asset managers already. On the hedge fund side, pretty much every hedge fund in the top 50 is now either trading in crypto, or looking at coming into crypto pretty quickly and setting lines up within the space.  

When you say we won’t see trading till 2023/24, is it that the infrastructure is there but the appetite is not, or is it the other way around? 

Zadeh: A bit of both. The infrastructure that pension funds and hedge funds require is very complex, and that is half there now, and more is coming. The appetite is definitely there to get there, to start trading, but there are a lot of regulatory hurdles. For pension funds that are more risk averse, that’s what is holding them back. But they are getting there, they are preparing the decks, I think most have accepted that crypto is going to be a critical component of their trading desks in the future, they’re just getting ready for when we get the all-clear from regulators. 

We’re also seeing banks opening up desks, and once the banks start doing that, we’ll definitely start seeing a bigger trickle-through into the buy-side.  

Will we ever see banks prop trade crypto? 

Zadeh: I think that might be quite a lot further down the line! 

Norfolk-Thompson: It’s all about capital liquidity rules. It’s impossible for banks right now to hold digital assets on their balance sheets at the moment because of crypto capital rules. Therefore they are having to interact either by setting up new divisions to hold digital assets, which is what Nomura is doing with Laser Digital, and what BNY Mellon are doing with their custody services. Those capital rules will develop – the UK and Switzerland are probably leading the race on that one though, the picture is more complicated in the US. 

Another point is that when you’re talking to the BlackRocks of this world, most of the larger institutions have at least a 12-18 month approval cycle. So they’ll have kicked off with a small sandbox where they let people play around with a few million dollars first, and now those cycles are starting to come to fruition, and we will see more people coming into the market in a more serious way. 

What are players like Matrixport doing to support that? 

Norfolk-Thompson: We are trying to support more active and fixed income focused traders come into the market. We’ve built out our research function, we’ve made new hires, and we’re putting out a weekly research piece focused on the things that active fixed income traders need – yield opportunities, volumes, what is executable, and what the underlying revenues of the system look like. It’s all moving along, but what’s urgently needed in the market right now is education.  

What does the liquidity profile look like, and why is there still so much reticence from the buy-side?  

Zadeh: The buy-side have different mandates, and these only allow them to deal in certain areas, so they’re restricted in terms of what they can go into. What we’re seeing right now is that a lot of the pension funds and hedge funds, even though they’re interested, aren’t actually the key players in this space. A lot of the volume is not being generated by the traditional names, but by the crypto native, digital native names. They’re becoming the big names, and the heavy hitters – very different to the traditional markets. It’s a new type of name that many firm wouldn’t even know if, if they don’t know this space. These guys are very nimble, very sophisticated, and they have access to capital at a very low level. They can build very complex algorithms to trade across – the market is so fragmented, and there are so many exchanges that they can find opportunities on. It’s these really nimble firms that can move really quickly when they see an opportunity, and get that accepted to trade really quickly, that are generating the most alpha and delivering the best returns. These are the firms we think will remain strong going forward.  

But once the big high frequency trading guys, the Chicago and US-based guys who haven’t yet fully committed, once those guys enter the market, they have access to the fastest and best technology, and the most capital, so how much of the market will be made more efficient once these guys start coming in and cleaning up these market inefficiencies? I wonder how many of these digital-native firms will be pushed out, once that happens. The discussions I’ve been having with the biggest digital-native players, they feel that the systems and the apps that they have built over the last four to five years are so strong that it will take a long time for anyone else to catch up if they’re starting from scratch. A lot of the market right now is systematic and API-driven – manual traders, point and click, macro crypto hedge fund traders are few and far between. It’s a systematic, API, blackbox game right now, with coders in the driving seat.  

Norfolk-Thompson: There is more liquidity out there than people think. There are a number of very specialist players with very deep pockets, who are happy to take a lot of risk in order to provide that liquidity.  

What’s on the cards for the rest of the year? 

Zadeh: One thing on the roadmap for us that is very close to fruition, based on our institutional focus, is a move to bring the institutional tools that traders are used to from the traditional world, into the crypto world. First and foremost, this will start with trade ideas. Hedge funds are very used to having a trade ideas person at every bank or broker, so they’re constantly being fed trade ideas, told where there is an opportunity, built out from research, and every morning sales guys at banks and brokers are shooting that out to everyone. This is something we’re now about to launch ourselves, providing trade ideas to clients – not saying “we’re a broker, use us for lending and execution services” but just adding colour and value to the space. That hasn’t happened in digital assets yet, and we’re looking to translate that over from the traditional market into the space for the first time.