Conclusions of the TradFi exchange of cryptocurrencies:

• Transparency of Digital Wallets vs. Omnibus Broker Accounts
• automated market making and gamification of trading
• added value through post-trade services
• Trade 24/7
• increased use of cloud hosting.

Today, during Hong Kong Fintech Week, HKEX and Nasdaq executives explored the differences between traditional stock exchanges and cryptocurrency exchanges and what they can learn from each other.

John Buckley, COO of HKEX, spoke about creating a blockchain capability by tokenizing alternative assets. “I don’t see any traditional exchanges trading cryptocurrencies in the near future. But I think we first have to learn and build that capacity internally. And then expand based on where our customers take us,” Buckley said. He sees the example of carbon credits as a strong application of blockchain technology and a good place to start.

However, traditional exchanges can learn from fintech, and he saw three areas where they can. First is the concept of a digital wallet. Brokers typically have omnibus accounts, which they use to execute trades on behalf of investors. And often only the broker knows who the final investor is. In contrast, a digital wallet can provide greater transparency about the underlying investor.

The second area is the use of code and automation. So automated market making is one example and playful trading experience is another.

Third, exchanges may wish to move their value proposition away from the matching engine to publishing trading services and use blockchain technology to solve some of the challenges traditional technology currently faces. Buckley didn’t elaborate, but typically one of the benefits of blockchain is providing a gold ledger that reduces reconciliations. And the possibility of settling in more flexible terms, sometimes without intermediaries.

Buckley also believes that cryptocurrency exchanges can learn from traditional exchanges. Traditional exchanges have developed microstructures around market making programs, incentives, tick sizes, block trading, and price discovery because price discovery is critical to fair, orderly, and liquid markets.

The other key aspect is that traditional exchanges are within regulatory systems, so you see the governance of crypto exchanges evolve. And the convergence will be driven by crypto exchanges facing more stringent regulatory requirements.

The COO of HKEX envisions the future exchange to be asset agnostic, based on a modular open architecture and using a hybrid cloud.

Nasdaq: 24/7 is the biggest crypto hit

Ulf Carlsson, head of Asia Pacific and Japan at Nasdaq, agreed with Cloud’s point. Exchanges are already using the public cloud for some functions. During the market volatility of March 2020 in the early days of COVID, Nasdaq volumes tripled previous peaks.

“We suddenly had to store a billion messages for a whole day. And it would have been impossible without the cloud to expand the capacity for regulatory purposes to store the data,” said Carlsson. Instead of peripheral services, he predicts that traditional exchanges will operate in the cloud in the future.

However, Carlsson believes that the most important thing about cryptocurrency exchanges is 24/7 trading. “The exchange technology of all the established exchanges today is not built that way.” Instead, they are designed around limited business hours, after which the data is cleaned and stored before the start of the next business day. And that process takes hours.

“When we started approaching the (digital asset) market, we quickly learned that our technology is not suitable for this,” Carlsson said. “We need to develop technology that works 24/7 to deliver the services that these markets want and that we think established exchanges would like to have in the future as well.”

He gave examples of TradFi exchanges that have extended their hours. For example, Hong Kong derivatives exchanges have an after-hours trading session from 5:30 p.m. to 3:00 a.m. He noted that the after-hours volumes are almost as much as the volumes of the major trading hours. Hong Kong, Japan, Singapore and other places also trade during holidays. Hong Kong holiday derivatives volumes are as much as half of a normal trading day.

“The trend is for longer trading hours if it is 24/5 like in the forex markets or 24/7. I think it will be decided for different asset classes,” Carlsson said.

Meanwhile, Nasdaq has just launched a digital asset custody solution.

DeFi exchanges

The issue of decentralized exchanges was raised. Dave Chapman of BC Technology, which owns Hong Kong’s only regulated OSL crypto exchange, says that DeFi exchanges exist now and will play a larger role in the future. However, for now, “participants who want to use them in a regulated institutional way, we are nowhere near that. Typically, because they want someone to blame when something goes wrong.”

HKEX’s Buckley responded that sometimes there is a desire for decentralization just for the sake of decentralization. “I think decentralization will only happen at a rate if the centralized solution doesn’t respond and meet the need,” he said.