There are nearly 300 cryptocurrency exchanges listed on CoinMarketCap – together hosting more than 20,000 trading pairs. Considering the crypto market is only a decade old and still small at a total market capitalization of $250bn, relative to other more traditional financial markets, one may wonder if such a crowded exchange space is even practical.
History indicates otherwise. Rather like the crypto markets of today, traditional financial exchanges also emerged in an informal, disjointed manner and only gradually consolidated into what they are now.
As adoption of crypto becomes more widespread, we expect markets to merge, either driven by economic forces aimed at capturing a greater share of trading activity, regulatory pressure to centralize and consolidate trading activity in one place, or technological innovation.
The question is, what does it take for an exchange to come out on top and retain relevance in a fast-evolving industry?
Over the past few months, I’ve had the pleasure of advising AAX, a next-generation crypto exchange powered by the same technology that drives the London Stock Exchange – one of the largest, oldest and most respected exchanges in the world. We believe that one guarantee of longevity will be trustworthiness. It is what financial investors continually look for above anything, and is underpinned by performance, security, integrity and the right partnerships.
The establishment of traditional capital markets is a story that takes us from merchants in Venice, dangerous ventures into the colonies of the British and Dutch empires, and makeshift trading venues on street corners, to the founding of today’s most prestigious exchanges.
In today’s crypto markets, we are seeing arguably an even more rapid evolution. What started out as a niche product, only discussed on forums just a decade ago, has now grown into a highly diverse asset class that has begun to attract attention from institutional investors, large corporations, and regulators alike – especially since the announcement of Facebook’s Libra.
In an effort to improve price discovery, increase liquidity, and appeal to professional traders, we see exchanges increasingly focusing on delivering low-latency trading systems and opening up markets for more sophisticated financial products such as crypto derivatives.
Furthermore, in the past two years, we’ve begun to see the rise of what we call a new generation of crypto exchange, differentiated by an affiliation with traditional financial markets and institutions.
At AAX, we read these developments as indicative of a maturing market and we believe that as the nature of this industry evolves, exchanges will need to continue to improve their operations across performance, security, transparency and integrity.
Raising the bar
With our sights set on the future, we’ve built what we term an institutional-grade platform that we are making available to retail and institutional investors alike. This means we hold ourselves to the same standards upheld by global exchanges and traditional capital markets in terms of orderliness, transparency, and performance. It also means that we provide an environment that is both suitable for professionals as well as accessible to retail investors.
Part of achieving this at AAX has been our adoption of Millennium Exchange, a price matching engine that is also at the heart of the London Stock Exchange. This powerful technology enables AAX to sustain deeply liquid markets and process large order volumes with latencies comparable to those recorded in the leading equity markets.
But performance is about more than just speed. It’s about resilience as well, especially in the crypto sphere where exchanges operate 24 hours a day, every day of the year. For this reason, AAX is deployed on Amazon Web Services (AWS) – one of the world’s leading cloud providers – making it possible to maximize uptime and scale up across multiple jurisdictions quickly in a controlled manner.
A trusted exchange also needs to be able to offer reliable custody solutions and have the appropriate security measures in place. This pertains to protecting assets as much as it does to client data. We are therefore working to comply with the open-source Cryptocurrency Security Standard (CCSS) guidelines, a widely recognized standard for securing cryptocurrency which outlines a multi-tiered approach to security which covers wallets, policies, procedures, and multi-sig authentication mechanisms to take all-critical actions.
For an exchange to be institutional-grade it furthermore needs to be managed with integrity. Whether you’re trading gold, stocks, or cryptocurrency, as an investor you want to be sure that the market you’re participating in does not send you false price signals, that you’re not trading with bad actors, and that everyone plays by the same rules on a level playing field. This is why we insist on robust KYC/AML compliance and having surveillance mechanisms in place to guard the market against price manipulation and other unsavory practices.
Finally, to strengthen our position and instill investor confidence, we’re also committed to joining forces with the right partners. In addition to our technology relationship with LSEG Technology, and partnership with AWS, we are in an ongoing process of securing more game-changing partnerships to connect capital across decentralized and regulated investment communities.
Trust; integrity, performance, security, and forging partnerships are ongoing endeavors. Here at AAX, we are innovating to create the critical cornerstones of a mature, stable ecosystem for trading crypto assets; today and for the future.
About the author
Based in London, Jamie Khurshid serves as an advisor to AAX. Voted by Financial News as one of the top 40 under 40 in trading and technology (2014) and ranked in the ‘Exchange invest’ Top 1000 most influential people in global financial markets 2017, Jamie worked in between New York and London at investment firms Goldman Sachs, Credit Suisse and The Royal Bank of Scotland with responsibility for new business, regulation, product development and strategic investments. He was closely involved in the establishment of two investment bank consortium ventures, Boat Services Ltd and Turquoise Exchange, now owned and operated by the London Stock Exchange Group. In 2014 he joined the leading independent exchange and clearing house technology provider Cinnober Financial Technology as a partner and took on the role of CEO at Cinnober Boat, Europe’s longest-running independent regulatory and transparency services vehicle for the financial industry, until the acquisition of Cinnober by Nasdaq in 2018.