ELECTRONIC-trading firms that have already transformed markets from stocks to foreign exchange to futures are diving into bitcoin and other cryptocurrencies.

Five of the biggest electronic traders in the world are already trading bitcoin. Jump Trading, Tower Research Capital and Hudson River Trading are in the market, according to people familiar with the matter, along with Susquehanna International Group. DRW Holdings has been trading digital currencies since 2014, giving it a head start on competitors.

High-speed firms have remade virtually every other electronic market, turning transactions over to algorithms and measuring market moves in milliseconds. But low volatility and trading volumes have eroded profits, pushing them to look for new opportunities.

Bitcoin, which has huge price swings, rose to a new high above $8,000 on Monday. And with CME Group and Cboe Global Markets poised to offer bitcoin futures contracts, it will get easier for pros to place bets, either on gains or losses.

“What’s surprising me is how polarizing bitcoin is,” said Bobby Cho, head of over-the-counter trading at Cumberland, a division of DRW. “Everyone has a viewpoint on bitcoin, whereas with other asset classes you either care or you don’t care.”

Cumberland mainly trades bitcoin and ethereum, but also transacts in zcash, bitcoin cash, ethereum classic and monero. Cumberland specializes in over-the-counter trading, helping institutions and individuals buy or sell large amounts of cryptocurrencies with a minimum trade size of $100,000. It also does algorithmic and electronic trading on digital-currency exchanges.

The crypto arm of Chicago-based DRW is extending its reach. Cumberland has counterparties in more than 35 different countries. It opened a desk in Singapore this week, adding to its locations in Chicago and London. Cumberland has about 15 employees in total, with more hiring on the way. Cho declined to comment on the division’s financials.

Jump has a team of more than 10 people focused on bitcoin trading, according to a person familiar with the matter. Susquehanna called itself an “active participant” in spot bitcoin trading, in a letter to regulators advocating an exchange-traded fund based on bitcoin, the Winklevoss Bitcoin Trust, which was rejected in March.

DV Trading, a Chicago-based proprietary firm, trades about a dozen cryptocurrencies on exchanges, and trades bitcoin and monero over-the-counter. About 10 people work in the one-year-old division, known as DV Chain.

GTS Securities, Virtu Financial and HC Technologies are among the electronic traders sizing up opportunities, without jumping into the market just yet, according to people familiar with the matter.

Virtu is considering making markets in bitcoin futures on CME and Cboe, according to a person familiar with the firm’s plans.

Representatives for those three firms, as well as Jump and Hudson River Trading, declined to comment. Tower didn’t respond to requests for comment.

Still, there are reasons to be careful and some firms are moving slowly. Lack of regulation and a nascent market infrastructure are among their reasons for caution. Data feeds from cryptocurrency exchanges are often unreliable, unlike the streams of information that official stock exchanges including the New York Stock Exchange and Nasdaq Stock Market sell to traders.

Reliability of technology is also a potential issue. One of the exchanges that CME wants to use to price bitcoin futures contracts, San Francisco-based Kraken, experienced an outage last week, for instance. Sometimes exchanges become inaccessible when traffic is too high.

“It is certainly a challenge to connect to a lot of these exchanges that are really no more than websites written by web developers,” said Garrett See, chief executive officer of DV Chain.

The cryptocurrency field requires a new playbook. Certain strategies that are commonplace in financial markets don’t work when trading cryptocurrencies. In futures and equities, for instance, traders try to locate their systems near an exchange’s servers to get the fastest possible access to the market. For digital currency exchanges that exist mainly online, however, that’s not as doable.

And then there’s the reputation-related hang-up: for all its sparkle, bitcoin is used for payment of illicit activities including drug dealing, money laundering and human trafficking, said Roberto Rigobon, professor of applied economics at the MIT Sloan School of Management, and a Bloomberg View contributor.

“Given bitcoin is the unit of account of many illegal activities, there could be a reputational cost” to any firms that hold it as part of their business, Rigobon said. “I understand the opportunities are there. But I think these organizations are not paying attention to the risk.”

Hedge funds are looking at cryptocurrency trading too, albeit with some trepidation. Man Group said it will add bitcoin to its “investment universe” once CME offers futures. John Burbank’s Passport Capital has client money invested in cryptocurrencies and is looking to expand, assessing various trading strategies, according to a person familiar with the matter. A representative for Passport Capital declined to comment.

This openness to explore so far stands in contrast to some major financial institutions like JPMorgan Chase & Co., whose Chief Executive Officer Jamie Dimon called bitcoin “a fraud,” and Credit Suisse Group AG CEO Tidjane Thiam, who called it “the very definition of a bubble.”

Still, for high-speed traders, it may be impossible to ignore.

“This is a place where sophisticated players can come in and get a return adding liquidity,” said Chad Cascarilla, CEO of Paxos. “There aren’t a lot of those places any more.”

Bloomberg/The Washington Post Service

Published in Dawn, The Business and Finance Weekly, November 27th, 2017

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