Chicago's sharp traders are natural hunters in wild crypto markets

The prices of digital currencies have collapsed this year. But Chicago’s proprietary trading industry is deepening its exposure to the wild crypto market nonetheless.

Proprietary trading firms are typically the highest-volume participants on financial exchanges. Risking their own capital, they usually make short-term bets, sometimes in the span of a microsecond. Many are located in Chicago, having grown out of the trading groups that once screamed and stamped in the pits of the Chicago Mercantile Exchange and the Chicago Board Options Exchange. To them, volatility is generally a good thing.

Digital currencies have been nothing if not volatile. With the action sluggish in conventional markets such as interest rates and gas, traders have moved into bitcoin and similar digital assets.

Such established Chicago-based trading groups as DRW, Jump Trading, TransMarket and XR Trading are now involved, according to executives. Some companies are also trading bitcoin futures contracts listed late last year by CME and Cboe Global Markets, as the board options exchange is now known.

The value of bitcoin, ethereum and other coins has more than halved against the dollar this year. Start-up crypto brokers and funds have run into trouble as investor interest has dried up. Trading volumes have fallen.

“Despite the fact that volumes are lower, more firms are trading it,” says Mike Unetich, vice-president of cryptocurrencies at Trading Technologies, a software vendor.

There was a bit of lag time because companies interested in trading cryptocurrencies had to become members of exchanges and identify a strategy with an edge in a novel asset class, he explains.

Proprietary traders say their interest is durable. Having moved gradually into the sector, many say they have a long-term vision of digital currencies’ future.

Jump was already one of the most successful traders of futures and bonds when it set up digital asset infrastructure a few years ago. A dedicated team now trades the 10-15 most liquid main cryptocurrencies and is also active in the futures markets, says Rob Sagurton, Jump’s director of digital asset direct trading.

Mr Sagurton is undaunted by the fall in crypto markets. “Our strategies are price agnostic, and we’ve continued to expand our capabilities in this market even as the euphoria has subsided,” he says. “The market for digital assets is here to stay.”

DRW’s crypto subsidiary Cumberland has in the past year opened offices around the world so it can serve as a crypto market maker around the clock, says Bobby Cho, Cumberland’s global head of trading. The unit has more than 50 people, mostly in Chicago.

“The bottom line for us is this isn’t a one-year type experience. Even though the environment might be lower volume, we see a bigger picture down the line,” Mr Cho says.

HCTech, a proprietary trading firm with a focus on foreign exchange, is “taking a hard look” at cryptocurrency markets, says Cary Rosenwald, a partner at the Chicago-based company.

He remains cautious. Challenges included an inability to quickly move digital currencies between the sector’s many exchanges. “Trading isn’t as much the issue with crypto. It’s more security as well as clearing,” Mr Rosenwald says. “Those two areas are really in their infancy.”

The novelty of digital currency has encouraged competitors to be more open to sharing ideas as they learn about the sector, traders say. Industry conferences, gatherings and happy hours at pubs are common around the city.

“I feel like there’s a meet-up at least once a week,” says Colleen Sullivan, chief executive of CMT Digital, whose crypto trading desk launched in 2017.

Coinbase, the largest US-based cryptocurrency exchange, opened a Chicago office early this year. It plans to employ between 50 and 100 people there within two years.

Paul Bauerschmidt, a former CME executive who heads Coinbase Markets, says the fall in volumes has given the company time to overhaul its matching engine before any repeat surge in interest. “We’re absolutely ‘long’ the idea that this comes back around,” he says.

Competition has whittled down some of the profit opportunities that attracted traders.

“It’s harder to make money in arbitrage,” says Brad Koeppen, head of cryptocurrency trading at CMT Digital.

On CME, the bid-ask spread to trade bitcoin contracts has shrunk 80 per cent since the start of the year, the exchange says. The wide divergence in price between exchanges has also diminished.

Garrett See of DV Chain, another Chicago trading group, says it was once possible to buy bitcoin on one exchange and sell it for $1,000 more on another. “There was money on the table and you could just pick it up,” he says.

Now prices move more in line. “You can tell more professional traders are in the space,” Mr See says.

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