In a related post we have described what it takes to set up a digital asset exchange. Similar to traditional financial markets, exchanges and brokerages differ significantly in the digital assets industry.
What is an Exchange?
SCALABLE defines an exchange as a standalone system, where the liquidity pool, as well as the custody, are fully reliant upon the operations team of the operator. This means that the owner is responsible for two main attributes of the exchange:
- Ensuring that, among others, (i) there is a wide range of different participants on each market (e.g. mom-and-pop, retail traders, and independent algorithmic traders), (ii) there are dedicated market makers who are responsible for providing best execution, (iii) there is active market surveillance team, and (iv) there are deep and liquid order books.
- Own custody operations team, which has to establish and build the processes and procedures related to customers funds management – for example, “hot” – “warm” – “cold” wallets structure, required balances on each, as well as staff accessibility and segregation of duties.
Both attributes point out certain benefits and disadvantages of operating an exchange.
- Operators get to choose the market makers and to monitor their activity.
- Operators can operate in a jurisdiction of their choice without worrying about the matching of orders between individuals from countries where digital assets are regulated and those from unregulated jurisdictions.
- Unless a third-party provider of custody is chosen, the client funds are fully managed by the operators themselves and do not need to rely on the security measures of the provider.
- Finding and signing and tracking the performance of experienced market makers can be a daunting, time-consuming, and expensive adventure.
- Making sure that there is sufficient liquidity on each side of every order book entails locking of large amounts of capital in highly volatile assets with highly limited and potentially costly hedging opportunities.
- Monitoring the trading activity of each market requires a dedicated team able to screen through financial data and alerts 24/7/365.
- Establishing a custody operations team and structuring the management and procedures must be done by professionals with a deep understanding of DLT, finance, and cybersecurity.
- Ensuring diversity of the liquidity pool is clearly the most difficult business and lacking it hampers profitability. In other words, if there are only retail traders who are on average liquidity takers and there are an insufficient number of liquidity makers (e.g. maker makers, machine learning (ML) arbitrage traders, and institutions), then orders will execute slowly, spreads will be large, and customers will eventually switch.
What is a Broker?
In contrast to an exchange, building a broker is a relatively quicker and less costly task. This is because the custody operations are built and connectivity to the liquidity pool is established from day one.
- Liquidity breeds liquidity. The pool that SCALABLE clients connect to is among the deepest and most liquid in the industry. Its diversity is unparalleled as some of the participants are instant exchanges, a number of brokers, a large number of retail traders, over two dozen institutions, market makers with nearly two decades of experience across traditional and digital assets markets, and hundreds of ML-algo traders. This means that large institutions will be able to trade with minimal price impact, while small orders will be processed nearly instantly at best prices.
- The dedicated market makers are obligated to post quotes among the narrowest spreads in the industry and are scrutinized for misperformance by the liquidity pool monitoring team.
- Market monitoring is done by a set of proprietary tools and a dedicated team with proven experience in market microstructure and market practices, ensuring best execution of any order.
- The custody operations are readily established and the broker operator does not need to worry about security, segregation of duties, and day-to-day management.
As it becomes evident from the aforementioned, setting up a broker is a different story from what one would expect when it comes to establishing an exchange.
Setting up a Broker with SCALABLE
Setting up a broker with SCALABLE is somewhat different as compared to establishing an exchange. In comparison to our previous , as outlined below, here one can observe that much fewer steps have to be taken to establish a broker.
- Establish a Target Market – define the countries and customers you want to reach.
- Define USPs and the Marketing Strategy – define one’s own unique selling points and find out what is the marketing strategy that would highlight these points as starkly as possible in the eyes of the future customers.
- Form Departments – structure the marketing, support, and compliance departments – much fewer than those required to run an exchange.
- Take Care of Legal – make sure that you know well what are the legal obstacles and how to work them out early. In the case of a broker these are usually fewer.
- Provide a List of Requirements to SCALABLE – define the trading pairs, APIs, interfaces customization, trading fees and etc.
- Technology Deploy – the system is deployed within up to 30 days depending on the requirements.
- Establish Processes & Procedures – make sure that the processes and procedures for testing and running the exchange are set up, such as development of UAT plan, the support guides and FAQ.
- Launch the Marketing Campaign – launch the marketing campaign and test its effectiveness to see if your USPs and Marketing Strategy are in sync.
- Launch the Broker – launch the exchange and monitor traffic, respond quickly to customer inquiries, and optimize the marketing approach.
We have worked with brokers across different jurisdictions, with various technological requirements and highly diverse legal structures. We have always managed to help them tackle all the tasks aforementioned with ease. This is something we are committed to practicing as the adoption of DLT is becoming ever more profound.