Crypto Q&A: Michel Finzi, trueDigital

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The decentralized nature of the crypto market makes it hard for institutional investors to get an accurate view of the market. IntelAlley caught up with Michel Finzi is the chief commercial officer at trueDigital, to discuss how the buy side can overcome this architectural challenge.

What is the most significant market data issue facing digital asset investors? 

As a firm that serves institutional customers, we feel that one of the most significant issues facing digital asset investors is that traditional pricing mechanisms based on solely on executed prices derived from lit exchanges do not accurately reflect the institutional market, thereby presenting a distorted picture of true price transparency for institutional investors. 

Why does this weakness exist?

This weakness exists because there are currently many existing pricing indices for spot cryptocurrencies, which are based primarily on executed transaction data from retail crypto exchanges. In recent months, multiple analyses from credible sources have cast significant doubt on the veracity of such data, particularly regarding reported trading volumes. While the OTC market is opaque and the size of the market is difficult to quantify, an in-depth analysis by the TABB Group shows that the over-the-counter spot market for cryptocurrencies is three to four times the size of the global retail exchange market. 

How can digital investors avoid or exploit this? 

We feel that it is essential that pricing indices used by institutional investors should incorporate data from the OTC markets, which better reflect the actual marketplace because they are more accurate and more reliable. Specifically, an accurate price is one that is representative of the level at which institutional size liquidity can be realized in the market, which is not often represented from retail exchange indices. A critical component of the methodology for any financial index is its resistance to manipulation. This resistance (or lack thereof) can come both from the index algorithm itself, as well as from the providers or venues from which raw data is sourced.

Although some retail exchanges have anti-manipulation resistance, many indices are volume-weighted average prices across their constituent exchanges. This lack of structural manipulation mitigation means that malicious or false trading activity can flow directly into the index itself.

Institutional investors who are evaluating cryptocurrency pricing sources should look at those indices which are comprised significantly from OTC market maker data. Further, they should seek out those index administrators who implement very strong algorithmic manipulation prevention and mitigation.

Can architectural design eliminate this, or is it merely the nature of the beast?

The best index administrators design highly effective ant-manipulation methodologies into their index construction to provide structural resistance to intentional or unintentional manipulation. Furthermore, index administrators who rigorously adhere to the IOSCO Principles for Financial Benchmarks will have strong governance and methodology review policies and procedures to ensure that the index design remains appropriate as market conditions or infrastructures evolve.

What do you see as the next watershed moment regarding this issue? 

We believe that many “watershed” moments will come in the near future for the crypto-trading industry. One, in particular, will be the long-awaited approval by the SEC of a crypto exchange-traded fund. One of the difficulties many ETF applicants have experienced is the SEC’s perception of the lack of pricing transparency; as such we expect that investible product and ETF creators will be exploring incorporating OTC driven indices into the benchmark for their funds.  

We also expect that as more and more hedge funds – and potentially traditional investment managers – enter the crypto ecosystem, the demand for highly credible pricing sources with institutional level source data, infrastructure, and governance will expand rapidly. This demand will service both the trading and price discovery processes as well as fund Net Asset Value calculation and risk management.