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News
Nasdaq and AWS Partner to Transform Capital Markets: I hope everyone in the US had a chance to rest & re-charge during the Thanksgiving holidays, because the market structure industry wasted no time dropping game-changing news the following week.
On November 30 Nasdaq and Amazon announced a multi-year partnership that would see Nasdaq’s various North American exchanges transition to a cloud environment, powered by Amazon Web Services. This comes on the heels of CME’s deal with Google that laid out a similar vision for cloud-supported futures & spot exchanges. Let’s dig into the release’s details with CME’s partnership in mind:
“Beginning in 2022, Nasdaq plans to migrate its North American markets to AWS in a phased approach, starting with Nasdaq MRX, a U.S. options market. Nasdaq will use a new edge computing solution that is co-designed by Nasdaq and AWS and specifically developed for market infrastructure.
This solution may also be used by other market infrastructure operators and market participants to move their trading systems to the cloud. In addition, the partnership will include opportunities to explore new ways to leverage AWS’s cloud capabilities across Nasdaq’s anti-financial crime, data and analytics, and market infrastructure software solutions.”
Core to Nasdaq’s move to AWS will be AWS Outposts, which extend AWS infrastructure, services, APIs, and tools to virtually any datacenter, co-location space, or on-premises facility. Nasdaq plans to incorporate AWS Outposts directly into its core network to deliver ultra-low-latency edge compute capabilities from its primary data center in Carteret, New Jersey. This co-designed edge computing solution would effectively establish Nasdaq’s data center as the first-ever private AWS Local Zone for the capital markets industry.”
(Source, emphasis added by me)
The Nasdaq-AWS cloud deal is in my view an entirely different beast from CME’s deal with Google. Unlike CME, Nasdaq is primarily a SaaS solutions provider to the market infrastructure space. When other exchanges & fintech companies need to outsource matching engine, surveillance or back-office tech services, they pay Nasdaq to build & manage it for them. Nasdaq is already well-versed in cloud infrastructure & leverages cloud technology to deliver market data & other services. With this AWS deal, one cloud SaaS solutions provider is outsourcing tech services to another. Intriguing, right?
I think this deal is about sharing knowledge & complementing one company’s niche with the other’s. Amazon can offer their core data center expertise to manage Nasdaq’s markets at the same quality standards investors expect for a cheaper cost. Nasdaq can offer its market structure knowledge to help Amazon build a better cloud service, and, depending on the nature of their partnership, both companies can offer this service to other exchanges down the road. This is where the details of their deal become very important. How much control will Nasdaq have over its technology when it migrates to AWS? Will AWS start to partner with other exchanges down the road, and will Nasdaq’s Market Tech business be involved? It will be very interesting to see how these cloud migrations change the way Nasdaq’s markets & tech support businesses evolve.
One final point to keep in mind with these announcements is that transitions of entire markets like this take a long time - Nasdaq didn’t change short or even medium-term guidance as a result of this news. More concrete details are needed before we can truly measure an impact to Nasdaq’s financials or stock price.
Crypto.com Agrees to Acquire Nadex and the Small Exchange from IG Group: Another crypto exchange has entered the US futures fray - Crypto.com has agreed to buy two CFTC-registered futures exchanges to begin offering crypto derivatives to retail clients. Crypto.com, a Singapore-based exchange with ~10 million global users & ~3,000 employees, continues their spending spree with this $200M+ acquisition after pouring hundreds of millions more into US marketing. Earlier this month the company paid $700M to buy the rights to the iconic Staples Center after similar deals with Formula One, the Philadelphia 76ers and the Paris Saint-Germain football club.
This purchase brings the number of exchanges eyeing US crypto futures to 6 - CME, FTX, Coinbase, CBOE, Bakkt and now Crypto.com. While this may give the impression that fierce competition is coming, I’m skeptical these exchanges can build much momentum despite their deep pockets. CME is currently the #1 US crypto futures exchange by a mile & is the only one with serious liquidity. Their Bitcoin & Ethereum futures markets recently hit new volume & OI highs & micro versions of these contracts have been successful. With a multi-year head start CME has captured nearly all the domestic institutional market share which I don’t think new entrants will be able to disrupt. This leaves us with retail - how many retail users are apt to trade futures or deal with margin & the clearinghouse? It’s still not clear to me what addressable market Crypto.com or others are trying to capture with US crypto futures and if they expect to beat CME in the process.
Dark Pool Liquidity Pitch Deck: An unregulated crypto market has its benefits & can be fun to play around with, but there is no doubt a dark side to an asset class with little to no oversight. Take Dark Pool Liquidity, a so-called crypto “market maker”. Well-known Twitter account @zachxbt found a pitch deck of theirs that advertises services like wash-trading, front-running & spoofing in certain coins on Uniswap and other decentralized exchanges. Their pitch is simple - with so many new coins coming to market & so little time to impress, initial price action of a project’s coin is crucial. What if, for a fee, market makers could ensure a project’s coin got off to a good start? If new users are attracted to a project because its price is going up, the market maker’s activity could more than pay for itself. What’s the harm in that?
Turns out, quite a bit of harm. Wash-trading, front-running and spoofing are illegal in the US securities industry because they take advantage of unsuspecting retail investors & undermine confidence in the market itself. The fact that a firm with experience supporting more than 50 crypto projects is openly touting services like this is surprising. @zachxbt’s full thread is worth a read to understand the difference between the legitimate, legal & needed services a market maker provides & those that have no place in established markets.
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Other Stories I’m Reading
Steven Cohen’s Venture Firm Backs 24-Hour Stock-Trading Startup
@NeckarValue Twitter thread about the rise of Bloomberg
Coinbase to acquire leading cryptographic security company, Unbound Security
Bitfinex launches FIX Gateway for high-speed trading
Charts of the Week
Retail broker Public.com released a fascinating blog post this week about their decision to not engage in wholesaler relationships that involve payment for order flow (PFOF). In the post, Public revealed their own internal smart order router that allows them to scan 28 different lit equity exchanges & dark pools to find the best possible execution price for their clients on an order-by-order basis. This is an impressive feat, one that deserves a look in closer detail.
Let’s put ourselves in Public’s shoes for a moment. We offer retail brokerage & execution services to our clients and want to provide the best possible service to customers while also turning a profit. We have two options to do this - we can either maintain connections to every execution venue & pay for expensive market data feeds to route orders & comply with regulations, or we can trust a wholesaler to do this for us & get paid PFOF in the process. The majority of firms go the PFOF route because it offers the least amount of upfront investment & the greatest profit potential while still complying with best execution laws. Public chose the harder, more expensive route & bypassed the wholesaler completely. The result? Public argues it provides better execution quality (tighter spreads & lower transaction costs to users) than the majority of competitors. I’m inclined to believe, and am impressed with, their claims.
This begs the obvious question - why don’t all brokers do this? Do smart order routers make wholesalers obsolete?! No, they don’t.
I’m not able to see Public’s financials or profit margins, but my bet is they’re much thinner than competitors. The combination of zero commissions, low interest rates on client funds, not taking payment for order flow revenue AND investing in smart order routing leaves Public with few options to build a sustainable business model. It will be interesting to see how the broker adapts in the coming quarters with these new costs & how retail investors take to the promise of higher quality execution.
One chart I found interesting in Public’s post is shown below - analysis provided by Bloomberg Intelligence shows how much bid/ask spread revenue goes to each part of the value chain. Public’s decision to invest in a smart order router should in theory make more of this pie chart go to investors & away from market makers, but more data released in the coming months will confirm.
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Disclaimer: I am not a financial advisor. Nothing on this site or in the Front Month newsletter should be considered investment advice. Any discussion about future results or projections may not pan out as expected. Do your own research & speak to a licensed professional before making any investment decisions. As of the publishing of this newsletter, I am long ICE, CME, TW, NDAQ and VIRT. I am also long Solana.