Today on the podcast, I sat down with Brandon Mulvihill, the co-founder and CEO of Crossover Markets.

Crossover is a newly launched ECN focused on institutional digital asset trading.

In this episode, we discussed the launch of their CrossX product, their partnership with Hidden Road on Route 28, and the evolving market structure for digital asset trading and settlement.

So without further ado, here's my conversation with Brandon Mulvihill.

Matt Walsh and Nick Carter are partners at Castle Island Ventures.

All of these expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures.

Guests and hosts may maintain positions in the assets discussed in this podcast.

You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion.

This podcast is for informational purposes only.

The federal government is stepping in to stabilize Fannie Mae and Freddie Mac, the 2 mortgage giants that have been threatened by the housing crisis.

The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing.

You print a couple trillion dollars and all of a sudden people start to worry.

So out of this worry, we have something called a Bitcoin.

Well, Brandon, thanks so much for joining us today on the podcast.

Likewise, definitely excited to get into it.

Why don't we talk a little bit about just how you got here?

What was your background and how did you get into digital assets?

And for the first 13 years, I was at a company called FXCM, which was predominantly a provider to the retail market of FX and CFD contracts.

Interestingly enough, I managed the institutional business, which we called FXCM Pro.

And for all the listeners today, this was totally analogous to the relationship between Coinbase and Coinbase Pro in the sense that we had massive retail audience and we leveraged the economies of scale from that audience to build an institutional platform.

We source liquidity in the foreign exchange market and distribute it to other institutions.

I was even thinking this morning about 1 fact.

We had an offering where customers, if they would allow us to rehypethicate cash, We could pay interest on deposit, which looks and feels like staking.

And that was a business that did around a trillion a year of volume.

And then in 2017, I went to Jefferies, the investment bank, and I kick-started an FX-framed brokerage business which we took, it was a small business that was clearing around 20,000 trades a year, And we grew that into a business that was clearing 300,000 trades a day.

And really my experience has always been centrally focused on retail brokers, market makers, and quantitative hedge funds.

And so A lot of analogies and parallels I think we'll get into and certainly some differences between FX and crypto, but that's where I started and then started to watch the crypto market, started to see some of those parallels and decided to found crossover markets.

And so were you paying attention to just how the digital asset market traded?

I'm curious what the impetus was to even start Crossover.

So at the time I was at Jefferies with my colleague and partner, Anthony Mazaris, and everyone was, this was back in 2018, we were, 2017, 2018, we were watching the crypto space with a lot of envy.

And in fact, we were looking at the time to light up a Bitcoin NDF that we would exclusively clear, which was an interesting project.

And through that project, we got a lot of exposure to the various market participants in digital.

And we started to form a view in the market about what was going well and some gaps that we thought could be addressed.

I think broadly, 1 of the big areas, we thought that there was a gap was in the institutional market.

We thought specifically trading technology.

We thought the decoupling of clearing and execution and things like in this area.

We thought there was an opportunity to really be disruptive and kind of help create a better market structure in the industry.

And so as the years went on, we just kept talking to participants and jotting down notes.

And eventually We wrote a white paper for ourselves and realized the time was right in 2021 to take the jump and go right into the crypto space.

Well, it's a fascinating market structure play that you guys have introduced here.

So why don't we just talk about what is Crossover?

So we're an execution-only trading venue, which we define as an ECN.

You could also call it a quote-driven model or configurable liquidity, which we'll get into.

And we are primarily aimed at bringing speed of execution and performance characteristics that would rival the equities of the foreign exchange market and bringing those things into the digital space, but doing it in a way where, obviously, you need to do it in the way that crypto is traded today in terms of 24-7 trading, in terms of precision, both in the size of trading and also the price of trading.

And part of what we do with the cross-sex platform and part of what we're up to is really just champion this idea that there needs to be a separation between who is clearing the trades, who is the custody of the cash or the coins, who is doing the execution.

Obviously, the execution layer is where our expertise lies, and then also who is making the market and who is effectively putting on the trades.

We like how that market structure is set up in equities and foreign exchange, And so we champion that idea in crypto, but we're specifically with crossover and cross-sex focused on the execution there.

I mean, it's a really compelling market structure in a world where we've just seen centralized exchanges blow up.

And this idea of bifurcating custody from the trading of these assets makes a ton of sense.

So why was it a market structure that works so well in FX?

And curious how you see this evolving in digital.

So in FX, What happened is when electronification FX trading started, there were a couple of dominant clobs or central limit order books, as they're known.

And they performed quite well for some time.

And then in and around 2004, 2005, you saw the first examples of ECNs or quote driven models.

These platforms were terribly disruptive and they're normally disruptive for 3 reasons.

They're disruptive because of configurable liquidity, they're disruptive because of their speed performance, but I'll cut right to the chase.

All 3 of those things are the necessary ingredients to driving down spreads.

And so to use an example, if you were to look at Eurodollar on the largest central limit order book in foreign exchange, if you wanted to buy 1 million euro dollar, you would pay roughly 1 point or 1 pip as it's called in that market.

Whereas on an ECN for that same $1 million trade, you would pay around 0.1 to 0.2 of a pip.

So there was literally an 80 to 90% reduction in the cost of trading.

There are some complexities we can get into it in terms of fill ratios and things like this, but in the end, the ECNs were terribly disruptive in the FX space.

And even if you look at today's market in FX, ECNs collectively do something like 200 to $500 billion a day of trading volume.

And so they've obviously done a great job of taking some big chunk of market share in the FX space.

How can these ECNs in the FX space compete so aggressively there?

So the primary thing is configurable liquidity.

If people think about a central limit order book, or we'll call it a clob going forward.

If you think about a clob, what happens is it doesn't matter if you have 10 customers or 1,000, you always have 1 market data session and 1 pool of liquidity.

And Really to dive into that even further, Matt, if you imagine you and I, we both trade with the same crypto exchange today, the same club.

You and I can be looking at our respective screens, we're gonna see the same pricing and the same liquidity.

And then if you put on right now a big trade, I'm going to see my screen react to the fact that you just put on a big trade.

Normally, this is a very good model in the retail space.

In ECN with configurable liquidity, what happens is every time at CrossX, we add a new taker of liquidity, we are creating an independent market data session and an independent pool of liquidity.

And so if you think about user 10 versus user 20, from the perspective of the market maker remember, market makers are in the business of big data.

The more data they have, the better for them because they're trying to make predictions based on behavior today, can they predict what's going to happen tomorrow, in a sense.

If that market maker knows the behavioral characteristics of user 10, even though those characteristics are very different from user 20, they can very accurately predict user 10's behavior tomorrow based on their behavior today.

And even though user 20 might be very different, again, it's the same methodology.

And so what happens is that the market maker is more comfortable being more aggressive in their market making and their effectively their prices, their spreads, because of that predictability.

And so this is 1 of the main drivers for why you've seen in the FX space and in other asset classes, the cost to trade on an ECN is normally always cheaper than a central mode order book because you have effectively what we could think of as optimized matchmaking.

So when you look at the digital asset market structure as it was, say, before ECNs, you're living in a world where you have retail brokerages that are also exchanges that are also custodians that in some cases actually ran their own proprietary trading firms.

It's just something that you look at and you say, there's conflicts everywhere here and it doesn't look very safe.

What's your view on how that will evolve over time?

And curious if you think we'll just live in a bifurcated market where you have these kind of wild west exchanges that coexist with the more institutional players.

Right out of the gate, what I would say is I don't know that we see it as so binary that exchange equals bad or exchange equals Wild West or anything like this.

When we look at the digital market, we think what's confusing in and of itself is the word exchange.

Because in financial services, the word exchange carries a very specific connotation to it.

It matters, It's defined in a certain way.

There's a clearing model and a mechanism for how things are expected to perform.

When we see exchanges in crypto today, what we see are brokers.

And so retail exchanges to us are retail brokers, institutional exchanges to us or institutional brokers.

And I say this because if you superimpose that concept on any other asset class, we see the same thing.

We see in foreign exchange and equities, we have retail brokers, we have institutional brokers, and there's absolutely a place in a market for those business models.

In digital though, where we thought there was an opportunity to be disruptive is that as an institutional brokerage or as an institutional exchange, there is no concept of fungibility.

And so these exchanges have their clients captive.

And so by definition, if you buy Bitcoin with 1 exchange, and again, for people listening in, just go ahead and conjure any exchange name that comes to mind.

So imagine now you're buying your Bitcoin dollar with that exchange.

By definition, you have to eventually close the position with the same exchange, right?

You can't buy with exchange A and sell with exchange B.

And what that means is that the exchange has you captive.

And for that reason, there's 2 things that come out of this that we think are noteworthy.

First of all, the exchange itself doesn't really need to have the best in breed technology.

Because you look at how the exchange is selling to their audience, they're really selling peripheral benefits.

They're selling the credibility of the exchange.

They're selling the safety of their funds, perhaps.

They're selling their onboarding experience.

They're not really selling the value of the actual technology.

And that is because they don't have to because they hold the customer captive.

In our business model with CrossX, the client in order to buy Bitcoin with us must have a credit sponsor.

We have Hidden Road Partners as a credit sponsor, and we also have CBOE or CBOE Digital, the American Futures Exchange.

And so what happens is a client opens an account with either of those credit sponsors, and then they're given access to the CrossX platform.

And they can buy Bitcoin with CrossX, but when they're ready to sell, they can sell anywhere else that they want.

And so we're always in the business of competing for 1 leg of the trade, so we're competing for the market share of an institution every second of every day.

And so for us, the first thing we see is for our tech, not only is it good, it has to be good for us to survive because we're not holding anyone captive.

And so for us, that's the first thing is really just the lack of fungibility.

And the second thing, and then obviously is the tech component to it, which we can get into why crypto got to where it is today.

We felt like the tech, regardless of institutional exchanges or retail exchanges, when compared, if you look at digital compared to other financial asset class, We think there's a lot to be desired in the digital space.

Trey Lockerbie without going too far into the regulatory implications of what might happen in the future here with this market structure.

I'm curious your view on just the segregation of custody from a central limit order book exchange.

Is this something that we will eventually see regulators really push for?

Do you think that regulators will eventually say like Coinbase, you can't operate a custodian that is attached to your exchange?

Do you think we'll see like a split like that?

The offerings have to be walled off from 1 another.

And so, for example, if you look at foreign exchange, you will have a bank that has a prime brokerage offering, who's also custodying the funds of their clients.

And then separately, you have the trading arm of the bank.

Now, there's nothing wrong with those services, having multiple services ultimately being offered by the same parent company, but there has to be a separation between the church and the state.

The trading arm cannot know the information that the prime brokerage arm knows and that the custody, these all need to be walled off from 1 another in terms of best practices.

The thing that needs to come to fruition in the crypto space, and I think what we're going to see with global regulation, is simply client money rules.

And so this is a mandated, regulated effort where every broker or exchange, as we want to call them today, has to isolate the operating cash of the company, though it has to be separate from the client money account.

Or in this case, it would be the coins that customers are holding.

Normally what we see in every other asset class is that's something that's highly governed.

The broker has to run daily reports and send those reports to their local regulator.

And so that reconciliation effort is a big part of the regulatory license that you need to operate that brokerage business.

So we think that's a straightforward copy and paste into the digital world across the globe.

1 of the things I'm really excited about that you guys just unveiled is this Route 28 concept in partnership with Hidden Road.

So I'd love to hear a little bit more about the vision there, what the product looks like and how it's positioned in the market.

Robert Leonard 2018 Route 28 is an institutional brokerage or Hidden Road refers to it as synthetic prime offering That brings multi-asset classes to the institutional customer base.

If you think of an online retail broker in Europe, let's say, today these brokers are trading crypto derivatives and they're accessing liquidity from various market participants.

They're also trading index derivatives and accessing liquidity from a very different subset of market participants.

They're also trading foreign exchange and they're getting that liquidity from a very different list of names.

And so what Hidden Road is doing via Route 28, 1 of the things that they're doing is they're offering those same market participants an opportunity to come to Route 28 and access all of that liquidity across crypto and index derivatives and in time foreign exchange contracts with 1 counterparty, which brings a lot of efficiency in terms of operations, cost of capital and things along that nature.

Now Hidden Road brings 1 thing to the table that we think is rather unique.

Not only the offering institutional exchange or brokerage offering, if you think of it that way, they're also, as a core business, a prime broker.

And 1 of the biggest challenges that crypto exchanges have today is that the market maker, If the market maker buys Bitcoin with exchange A, that market maker is hedging somewhere else.

And so for the market maker to unwind the trade with exchange A, they have to skew their pricing.

And when this happens, it creates temporary distortions of pricing to all the clients on that exchange.

It's a problem that doesn't need to exist.

What's interesting about Hidden Road is Hidden Road provides that market maker the same opportunity, or a different opportunity, I should say, to hedge over the name of Hidden Robe.

And so what that does is it preserves the credit of that liquidity provider such that that liquidity provider can continue to price just as aggressively at 4 p.m.

In the day as they were earlier that morning.

What that doesn't do is it doesn't speak to spreads.

It doesn't necessarily speak to the actual spread when a client goes to buy or sell.

So CrossX, we talked about configurable liquidity.

This is probably a good time to talk about why speed and performance matters.

Right now, every crypto exchange in the world has what's called throttling, which means they tell their market makers, you can only give us 10 quotes per second, or 100 quotes per second, or whatever the number is.

Everyone has a slightly different variance of that based on their tech.

But there is a finite number that the market maker is allowed to provide.

And if you think about it, if exchange A allows a market maker to do 10 quotes per second and exchange B allows a thousand quotes per second, who do you think gets a tighter price?

The amount of quotes a market maker can provide is directly correlated to spread.

At CrossX, we have no quote restrictions.

In our first 3 months of trading, we processed over 50 billion quotes and we're using less than 2% of our capacity.

This is kind of a similar example with speed of execution.

When we started Crossover, everyone looked at us like we were a little bit crazy, that you'd really need to be so fast in execution.

People are trading on mobile apps, and are over the internet, on WebSockets and REST APIs.

And the answer was no, directly this is not important.

The reason speed of execution is important is that indirectly it brings down the cost of trading.

Right now in the first 3 months of trading, we are processing 99% of our orders in sub 10 microseconds.

So again, similar example, there's a crypto exchange out there, I won't name them, that's very aggressive in referring to themselves as 1 of the fastest crypto exchanges in the world.

That means that a market maker can come to CrossX and get 100 price updates from us in the time that they get 1 price update from that crypto exchange.

So again, who is the market maker going to price more aggressively?

So between speed and performance and configurable liquidity, what we bring to the table for Hidden Road by Route 28 is the technical capability in every asset class that they're in, whether it's digital or index derivatives or forward exchange or other asset classes in the future, we're giving them technical capacity to always ensure that they are among the tightest spreads on offer in the industry.

When I think about this from the perspective of a retail broker, and maybe 1 that's not even in the crypto space yet, it seems like this would be a very compelling offering.

I'm curious how you think about the taker side of this and particularly retail brokers that might not even be in the game yet, how they will be thinking about entering.

We think there's going to be a mass migration in the next few years of traditional online retail brokers adding spot crypto either directly to their platform or under some form of a subsidiary, in rarer cases, maybe even under a related or slightly different brand.

We think that, and we do have some, in speaking to a lot of these clients, this is more than, I guess, just thinking.

We know that they're coming into the space and we do have some big announcements, I guess, coming in the following weeks from here.

I think when we look at the crypto space pre all the calamity that hit, that started really in the summer of last year, what we were seeing in the space is we were seeing these crypto exchanges amass huge audiences of retail users.

They had giant balance sheets and they were making all kinds of money.

And it just felt like, wow, it could be possible that it might be easier for them to go launch stocks or FX or other contracts and things like this, than it would be for a trad-fi retail broker to go offer spot crypto because of regulation and what was happening there.

And I think since all these events have unfolded, I think the opposite is now true.

I think that it's going to be very difficult for crypto exchanges with any level of speed to start to add effects and equity shingles to their offering.

Whereas conversely earlier in this call, Matt, we're talking about how should crypto exchanges treat client money?

What do we think the regulators are going to do or mandate?

Well, what I think the regulators are going to do or mandate to crypto exchanges is what they've already done to every other trad file online broker.

And so from that perspective, these online brokers behave in a way when it comes to capital adequacy, when it comes to client money, when it comes to rehypothecation or staking as it's called in crypto, when it comes to marketing disclosures, they already behave in a manner that 1 would expect to enter the crypto marketplace.

So we think in the next 2 to 3 years, when you look at the top 20 brokers or exchanges on offering in terms of trading volume, we think at least half of them will be trad-fi names offering spot crypto versus today, it's purely crypto native exchanges.

I'm also just curious how that will impact your product roadmap.

You're going to have these new entrants that come in and they want new things that don't exist yet in the digital market.

I think you'll see a proliferation of types of financial products that exist in tradfi that will come to crypto.

How do you guys just think about that internally in terms of what to build next and who to build it for?

I think this part speaks to the team itself that we assembled when we founded Crossover.

We are 3, the 3 founders, my 2 other co-founders and I are all TradFi folks.

Our CTO was in equities and fixed income for 25 plus years and then I met him in foreign exchange 10 years ago.

Our CCO, and that's Vlad Risen, our CCO Anthony Mazzaris and I have worked on and off together in foreign exchange for almost 20 years.

When you look at the foreign exchange market, anyone who's worked in the institutional space in FX, by definition, has had to understand global regulation.

The currency movements cross regions and boundaries.

And so it's just commonplace that if you've been in FX for some period of time, you're gonna be very familiar with the CFTC in the US, or you're gonna be very familiar with the FCA, you're gonna be familiar with Boffin, you're gonna be familiar with AMF in France and the SPK in Turkey and the GFSA and so on and so forth in a way that in equities or futures, you might not be.

There's lots of equities venues that are SEC regulated who have never even attempted to operate outside of the US.

It's just not as global in offering as what you see in FX.

The other thing that happens in FX that you don't necessarily see in the other asset classes is it's also commonplace for FX to have matching engines across the globe.

So it's very commonplace to see an FX CCN located in NY4 and also in LD4 in London and then maybe in Singapore or Tokyo.

And so the management of those multiple matching engines, it's not a trivial task.

I bring this up because in the digital space, it feels a lot more like FX in that regard, both in terms of operating technology, but also in regulation, you need to be very, very tuned in to the global landscape, not just 1 particular region or the other.

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On The Brink with Castle Island - Brandon Mulvihill (Crossover Markets) on Digital Asset ECNs (EP.468)