Welcome to another issue of Front Month, a newsletter covering the biggest stories in exchanges & market structure every Friday. If you have questions or feedback, please reply to this email or find me on Twitter. If you like this newsletter and want to follow the exchange industry with me, please hit the Subscribe button below & be sure to share with friends & colleagues:
Tether Executives Said To Face Criminal Probe Into Bank Fraud: On July 26 news dropped that the Department of Justice was investigating Tether’s US bank activity to determine if it broke the law by hiding crypto-related transactions from regulators. Tether is an integral part of crypto market structure, serving as the industry’s largest & most popular stablecoin. Scandal has been intertwined with the company since inception - Tether claims its $60 billion in stablecoin issuance is backed 1:1 by cash & cash equivalents, but has never released sufficient proof in support. Critics allege the company is issuing un-backed Tether to inflate the price of Bitcoin & other cryptocurrencies and getting rich in the process.
The DOJ probe is important because its outcome could hurt market confidence in Tether’s 1:1 peg, impacting the liquidity & price of every other cryptocurrency.
Robinhood Working on Feature to Let Users Invest Spare Change: A test version of the Robinhood app revealed plans to include a feature that lets users round up purchases and invest the difference, similar to apps like Acorns & Chime. Users would likely be asked to connect their debit or credit card and give Robinhood access to purchase data to use the feature. The app also revealed a crypto volatility protection option that would limit order quantity & size under certain market conditions, helping the company avoid system outages & angry customer feedback.
Cboe Europe and EuroCCP Receive Dutch Regulatory Approvals For New European Derivatives Market: CBOE’s highly anticipated launch of its new derivatives exchange has now received all necessary green lights & is scheduled to go live on September 6, 2021. The exchange will begin with futures & options products on six indices that track stocks in the UK, France, Germany, Switzerland and the Netherlands, putting it in direct competition with LSE and Euronext for volume. More products are expected to launch in the coming months.
CBOE also announced that their products will be self-indexed, meaning the exchange will calculate benchmark prices themselves instead of using an outside provider like MSCI or FTSE. The decision is important because it serves as another challenge to the brand value of an index provider - do users care who calculates their index? I think the answer is ‘yes’ - we’ve seen other exchanges try self-indexing in the past with minimal success as traders opt for well-known, liquid benchmarks over their exchange-branded offshoots. I think CBOE will have a tough time gaining traction here because it will have to convince traders to connect to their new platform AND use their new indices at the same time.
It won’t be long now before we finally see if European market structure is eager for disruption the way CBOE says it is.
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Other Stories I’m Reading
A Look At Crypto Options - Waiting For The Robinhood Moment: This insightful post by @AutomataEmily attempts to answer a deceivingly complex question: If traditional retail equity options volume has exploded since March 2020, why hasn’t crypto seen the same kind of explosion in options demand?
A few reasons surmised in her post include:
Poor user experience for retail options traders in crypto.
Harsh regulatory stance taken by the CFTC and other regulators around crypto derivatives exchanges without a sanctioned KYC process.
More challenging liquidity environment - making markets in crypto options requires a liquid perpetual swaps market & safeguards in place to prevent market makers from blowing up. Few exchanges support this today.
A lack of high quality market data needed to price crypto options.
High transaction fees to interact with the blockchain.
Uniswap Presents at EthCC[4] Event: Uniswap’s Growth Lead Ashleigh Schap (@ashleighschap on Twitter) gave a talk at a recent Ethereum France conference where she pulled the curtain back on Uniswap’s plan to integrate with traditional finance applications. The presentation is only ~20 minutes long but is filled with telling quotes:
“We’re doing a lot of work to integrate with consumer financial applications… and they’re the ones reaching out to us. PayPal wants to talk to us. E*Trade wants to talk to us. Stripe wants to talk to us.”
“Our plan is to build a KYC product in partnership with these consumer fintechs to allow them to plug into the world of DeFi”
“When someone places a crypto order on Robinhood, there is a set of market makers that they’re working with that have daily limits on interactions with their users… they all have different settlement processes and they can’t get enough throughput. Traditional market makers are not enough.”
If the above quotes are anywhere near true it signals a bright future for not only Uniswap but all of DeFi. Traditional fintech companies are realizing the value of decentralized liquidity on the blockchain are putting in real time & effort to partner with leaders in the space.
London Stock Exchange Suffers Indigestion From Refinitiv Deal: This is a good check-in post from the Wall Street Journal on the LSE-Refinitiv deal, summarizing analyst reactions and the company’s current challenges. After LSE announced it needed an extra ~$200 million in investment to improve Refinitiv’s products, the stock became a “show-me” story as investors decided to wait & see if growth can meet management expectations. LSE is -15% this year, making it one of the worst performing exchange stocks.
Chart of the Week
The majority of exchange & market data stocks reported earnings this week with varying levels of market reaction. Companies with greater index exposure - like Nasdaq, MSCI and S&P Global - saw the best relative YoY results as the passive investing trend matured further and prices rebounded from 2020 COVID lows, helping boost AUM and subscription fees.
The larger exchange conglomerates struggled the most this quarter - ICE and CME both reported close to flat EPS growth, and Deutsche Borse was only able to grow earnings through M&A. With volatility so high in 2020 across nearly every asset class, exchanges are finding it hard to post exciting numbers without even more volatility & volumes in 2021. My next premium post will be a complete analysis of earnings season after all reports have been released:
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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, COIN and VIRT. I am also long Bitcoin, Ethereum, and UNI.