Wall Street's Biggest Players Plan New Crypto Exchange

EDX Markets, backed by Charles Schaub, Citadel Securities, Fidelity Investments, and others, will initially offer only a handful of cryptocurrencies such as bitcoin.

Robert Stone

Traders who buy and sell digital assets on a new cryptocurrency exchange will pay significantly less, thanks to the efforts of some of Wall Street's biggest players. According to its lawyers, the company's lawyers are confident that bitcoin (BTC) is not a security - thus avoiding regulatory drama in Washington. Two of the largest U.S. retail brokers, Charles Schwab (SCHW) and Fidelity Investments (through its digital assets arm), support EDX Markets. The venture is also supported by two of the largest U.S. stock trading firms, Citadel Securities and Virtu Financial (VIRT), and investment firms Paradigm and Sequoia Capital, which EDX

expects others to join. EDX CEO Jamil Nazarali said Tuesday that the company aims to push crypto toward the low costs of U.S. stocks. To illustrate, he gave the example of an investor wishing to buy $5,000 of an S&P 500 exchangetraded fund, whose spread, or cut, would likely be a few cents. The cost of a similar-sized BTC trade might now be $25, according to Nazarali. According to Nazarali, this market structure costs individual investors a lot of money. "We want to bring many of those efficiencies from the stock market to the digital marketplace."

The securities question.

U.S. regulators are sorting out crypto assets as to whether they are securities and therefore require a higher level of oversight. EDX is sidestepping that battle. Initially, the company will offer only a "few tokens we do not consider securities," Nazarali said. This includes bitcoins. In November, EDX will open for a pilot round of trading, followed by an official launch in January, Nazarali said.

Market makers such as Citadel Securities (Nazarali's former employer), Virtu, and possibly other market makers will execute the orders brought in by retail brokers in EDX's consortium. According to Nazarali, lower trading costs will result from market makers' competition.

In addition, some accouterments professional trading firms like Citadel Securities and Virtu rely on will be brought over. Apart from the New York Stock Exchange and Nasdaq, which operate from other New Jersey data centers, the EDX exchange will be based in the NY4 data center in Secaucus, New Jersey.

Exchange customers can now house their computers in the same data center called colocation. Due to the use of cloud platforms, crypto exchanges have historically been hard to physically locate, making getting the fastest access to them more difficult.

Market makers can quote tighter prices when colocation reduces latency and increases determinism. Its location in New Jersey is unique because major trading firms like Citadel Securities and Virtu use microwavecommunication networks to connect NY4 to another important colocation exchange in the U.S.: CME Group (CME), located in a data center near Chicago, Illinois. If professionals on EDX are trading bitcoin itself, CME's bitcoin futures contracts offer an obvious way to offset risk. Crypto trades are outsourced to third parties for execution by Robinhood Markets and other major U.S. retail brokers not currently listed among EDX's backers, including Jump Crypto, the digital asset division of Citadel Securitieswhich Citadel Securities and Virtu compete.

EDX would love to attract that volume, Nazarali said. He said it would be good for retail broker-dealers if all of that comes on exchange. After working in traditional finance for Citadel Securities, Nazarali switched to crypto because of the energy in the ecosystem. "There are a lot of younger people," he said. "It's very energizing."