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BNC and BTSE bring robust pricing to a fractured market

#crypto #bitcoin

The fractured global landscape of crypto exchanges creates almost constant price disparity between them which may be an algorithmic arbitrageur's dream but the dramatic moves do not benefit the majority of retail traders. ETFs and other retail derivative products will also be kept at bay so long as there is a lack of a trusted third-party industry pricing standard.

In the legacy markets indices are created and maintained by rating agencies, such as Standard &Poor, market data vendors and specialist index providers such as NASDAQ, FTSE and MSCI. From a standards perspective, the International Organization of Securities Commissions (IOSCO) sets global criteria for indices and benchmarks for the capital markets, working alongside the G20 and the Financial Stability Board (FSB).

Self-indexing is a trend among fund and financial product providers to reduce management and transaction fees, by creating their own indices derived from their own prices, designed to cut out third-party costs. However, this benchmark-setting has raised conflict of interest concerns by EU regulators, ranging from front running index changes or tampering with an ETF’s net asset value. This risk applies equally to crypto funds and indices.

Retail traders in the crosshairs

This lack of standard setting and vetting has left retail traders more at risk of price manipulation on self-pricing and self-indexing trading platforms than they are in traditional markets. These are often exchanges that derive their spot prices from their own reference rates (from their own trade and order books), and often use synthetic products to create crypto derivatives and leveraged products that appeal to retail traders but are often not in the financial interest of the customer and can in fact compound risk-taking.

This is particularly the case on contracts-for-difference (CFDs) trading platforms which have pivoted to crypto products and even creating their own tradeable indexes. CFDs are derivative products which allow easy access to a range of legacy markets (bonds, stocks, commodities) and crypto markets with large margin, often up to 100x, so has great appeal to retail traders. However it is a contentious business model and CFDs are illegal in the US and the UK and French financial watchdogs are considering a ban on all retail crypto derivatives and all CFDs.


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CFD market-making platforms share a similar marketing tack as bookmakers; E-Toro, CMC Markets, Plus500, and newcomer Skilling all advertise to the betting public through sponsorship of professional football teams.

These exchanges are known as ‘market-makers’ as they provide the liquidity and reference pricing for all assets and also act as the counterparty to customer trades, which can create obvious conflicts of customer interest. Given crypto markets are prone to bouts of wild volatility, retail traders using a CFD platform leave themselves exposed to both external and internal manipulation.

The other option for retail traders looking for derivatives and leveraged products is to use crypto-native exchanges such as BitMEX, OKEx, Huobi or Deribit. These are all experimenting various iterations of anti-manipulation and liquidation measures to protect users from outsized market movements.

BitMEX Bitcoin XBT futures market is the largest derivative market which drives the majority daily BTC trading volume. The index constituents for its futures market price are the spot markets on Bitstamp, Coinbase Pro and Kraken. However, the BitMEX Bitcoin market is orders of magnitude the size of the spot markets of its price constituents which has led to large price dislocations between them.

BitMEX also operates primarily as a market maker and its XBT perpetual swap contracts trades closer to a spot rate than a futures (providing a similar function to a CFD).

The conflicts of interest on market-making platforms:

(i) Self-pricing and indexing - Increases the chance of internal manipulation of single asset spot prices and volumes as the exchange sets the reference price provides the liquidity

(ii) Hunting stop losses - as the exchange keeps all orders on its books it knows the price areas traders have their stop losses and have the ability to move price past that level

(iii) Self-indexing products using their own reference prices - raises concerns around transparency, manipulation and fairness in customer disputes

A CFD is a derivative product, usually on shares, fiat currencies or indices, which allows traders to leverage their position and bet on the direction of price. The contracts are traded on margin with an agreement between the parties on either side of the trade to pay the difference in price movement; a very similar mechanism to spread-betting and should never be used for long-term investments.

Liquid Indices: Towards a digital standard

As the digital markets are global and fragmented there is no such standard setter, as it is yet too nascent an industry for the big rating industries to audit. It is not an issue of data procurement - as nearly all price and asset data is available through public APIs - but of data curation.

Brave New Coin has taken the initiative to align its LX indices-series with appropriate IOSCO standards from the start. And now, in a first, it has created a tradeable basket index for BTSE, a Dubai-based fiat-crypto exchange that trades in the spot and futures markets.

The constituent assets of the BBCX index are Bitcoin, Ethereum and Litecoin, and priced using Brave New Coin’s Real Time Pricing (RTP) service, which calculates cryptocurrency price indices in real time from the orderbooks of approved pricing sources.The BBCX product is one of the first in the industry to track a basket of crypto assets across a number of pricing sources at sub-second frequency.

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BBCX Constituents and weights

  • BTC 60%
  • ETH 33.25%
  • LTC 6.75%

Where other BTC price indices rely on executed quotes (trade history) for price discovery, due to its high frequency of calculation the RTP service uses only executable data (limit order book). As such, RTP rates are forward looking in nature, and act to accurately reflect demand-supply dynamics at a single point in time.

There are several benefits to this third-party method for both the broker and client.

BNC indices mitigating manipulation and price deviations

On September 24th, a BTC selling event caused a disconnect in price on the Coinbase exchange. Users were reporting a non-functioning orderbook at the time, with a large spread in prices. Coinbase Pro and Coinbase Prime also had a disconnected price for a short time period. Random and unpredictable events like this again illustrates the need for robust market indices for all products that rely heavily on accurate price information.dd description

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On September 24th, Coinbase, one of the world's largest and most reputable exchanges experienced a technical issue with its orderbook engine which resulted in its BTC/USD price to disconnect from that of other global exchanges and causing a large spread in prices. It's other services, Coinbase Pro and Coinbase Prime also had a disconnected price for a short time period.

Although this presented an arbitrage opportunity for high-frequency traders, these random and unpredictable events illustrate the need for robust market indices for all products that rely heavily on accurate price information.

Another price dislocation event occurred in July, when Ethereum experienced a flash crash across exchanges caused by an outsized order on the Bitstamp exchange. The price dumped from ~$270 to $190 in a matter of minutes, wiping out customer positions not just on Bitstamp but also on the major exchanges Bitmex, Kraken, Gemini and Coinbase.dd description

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The difference in prices drops during a flash crash in Ether between five exchanges compared to an aggregate liquid index of the most trusted exchanges

Using a Liquid Index price for Ethereum, the ELX would have protected trader’s stop losses when the large sell order on the exchange Bitstamp dumped the price of ETH, particularly on Bitmex and Bitstamp.

For brokers, using third party (and IOSCO consistent) indices can support them in response to “price challenges” by customers - for example, if a CFD client disputes a price or settlement rate that has been applied to their position or trade, the CFD provider can say “at the time that price was struck we were using XYZ index, which gave the price of 123”. If the party requires further investigation, the index provider should be able to point to their methodology and published prices as the prevailing rate at the relevant time.

Zero fees are a bug, not a feature

Preferably, retail investors seeking fiat-crypto exchanges would use a platform which processes their orders straight to the global markets and use an independent price and index provider but these platforms are less well known (not the main sponsors on football and rugby jerseys) and don’t offer the same breadth of trading products or tools. They are often lured in by the 'zero fees' and 'tight spreads' pitch which, as we have seen, often leads to conflicts of interest.

The crypto exchange landscape is highly complex, fractured, clunky, and at risk of hacks. The demand is there for crypto to be traded alongside traditional assets and there remains a gap in the market for a trusted provider that can stand by the provenance of its reference pricing.



Andrew Gillick, Khareem Sudlow