What’s a Cryptocurrency Prime Brokerage?

In the traditional finance markets, institutional trading is facilitated by middlemen called prime brokerages. Institutional traders need external support to help find liquidity for major trades, to make sure they’re staying on the right side of financial regulations, and to add a layer of security to the whole process.

Let’s imagine a trader wants to open a position worth tens of millions of dollars in any asset. On their own, they may not find adequate liquidity on a single exchange — their order could move the market and cause significant price slippage. An alternative is splitting their order up and trading across multiple platforms, although this will create its own problems with price variations and lack of agility.

For institutional traders simply focused on making a profit, these additional factors add a layer of complexity to their operations. This is equally true for institutional traders dealing with crypto, perhaps even more so. Prime brokerages step in to offer solutions for liquidity, security, and advanced technological requirements when it comes to setting and filling orders. This is how it works.

What Exactly is a Prime Brokerage?

Source: SocietyGenerale.


Prime brokerages are a subset of the prime services usually offered by banks and financial institutions to trading groups like hedge funds or other banks. These services handle trading, custody, and advisory matters for institutional traders. For example, major investment banks like JP Morgan, Credit Suisse, Goldman Sachs act as prime brokers for hedge funds. A key role that prime brokers play lies in connecting traders to the myriad services that they need to access.

Consider the behind-the-scenes work that goes into a hedge fund placing a major trade. First, there is any number of exchanges and lending platforms that a hedge fund could potentially choose from for any given asset. Let’s say the fund is trading futures: the amount of futures the fund wants to buy may not be available at any one exchange, and they often have to search for many different exchanges and providers. The price may vary slightly from one provider to another, adding another layer of complexity to the task of placing an order. Once they have the right exchange, there’s the matter of choosing a market entry point.

There are a lot of moving parts to institutional investors, and prime brokerages essentially act as a middleman, streamlining the task of placing potentially market-moving trades by offering enterprise-grade services to enable the trade and help ensure things go smoothly.

Gathering and analyzing market data is fundamental to the success of a trade, and institutional traders use tools and trading algorithms designed for their specific needs. Moving large amounts requires additional security protocols, and traders use custodian services to facilitate that.

Institutional traders like hedge funds may also wish to avail themselves of other related services like capital introduction, where funds are introduced to potential investors that can raise their holdings. All of these services can be provided by mainstream prime brokerages. Institutional traders essentially outsource vital operational tasks to these brokerages, allowing them to focus on strategy and revenue generation.

The Need for a Crypto Prime Brokerage


Prime brokerages are a staple of traditional financial markets. They’ve been around for a long time, and institutional traders like banks and hedge funds universally use them to deal in assets. Institutional traders in crypto have the same needs as their mainstream counterparts, and crypto is significantly less catered for than traditional finance.

Despite boasting a market capitalization of nearly a quarter of a trillion dollars at the time of writing, cryptocurrency is still a disjointed ecosystem. There are thousands of exchanges, but few ways to trade across all of them. Ad hoc solutions like order and execution management system (OEMS) solutions are prevalent in the industry, connecting traders to multiple platforms through an individual account. However, this does not solve the problems that prime services can. OEMS solutions simply aggregate the API of multiple accounts, requiring the individual to still open and manage accounts at every single exchange to which they want to be connected; compared to proper prime services, that doesn’t do much to mitigate counterparty risk, properly custody assets, or manage regulatory considerations.

With legal regulations still in their infancy regarding crypto trading, there are fewer safeguards and protections offered to traders in the space, something which institutions dealing in large sums find intimidating or entirely prohibitive. Over $4 billion worth of cryptocurrency has been hacked so far in 2019 alone, already more than double the reported amount in 2018. A sizable amount of that money was lost by exchanges and wallet providers, and there is little recourse when it comes to recovering lost or stolen cryptocurrency.

The technological infrastructure supporting the crypto market is also less developed than that of the mainstream financial markets, with vulnerabilities, bugs, and inefficiencies rampant. Most major exchanges offer quite rudimentary features and tools — typically nothing more than the basic stop loss and market/limit order options.

As Paradigm investor Arjun Balaji observed, there’s an urgent need for custodian services to protect and insure large sums of cryptocurrencies being bought and sold by traders. The issue of liquidity can affect all traders at times, and for institutional traders, the liquidity pool provided by a single exchange typically isn’t enough to fill trades. Institutional traders also need advanced tools and market data to facilitate their activity, as well as industry connections to help coordinate large trades without losing value, moving the market, or running afoul of emerging regulations.

This is where cryptocurrency prime services for trading come in. At SFOX, we’ve created advanced prime services to accommodate retail brokerages, exchanges, enterprises, and fund managers in crypto. SFOX plugs into all major cryptocurrency exchanges and scans the entire crypto market for arbitrage opportunities, allowing traders to get the best marketwide price execution every time they trade.

We offer multi-functional algorithmic trading through 9 different advanced algorithms, which can allow for smart routing. Traders can place large orders without moving the market, dispersing their funds across multiple exchanges at the lowest price available. Our Separately Managed Accounts Solution allows fund managers to create and maintain compartmentalized cryptocurrency trading strategies for each individual clients and manage them from a single login. Our platform also features market enterprise-grade market data and tools, and we’re currently working on the launch of unprecedented custodian services.

Impact on the Market


Cryptocurrency prime brokers stand to make a major impact in the space, creating the right conditions for institutional traders to thrive. As prime brokerage services begin to emerge, the space stands to become more interconnected and easy to navigate, allowing mainstream financial institutions and crypto hedge funds alike to scale up their presence and trading activities.

Improved liquidity may prove to make the price action less volatile, encouraging more funds and traders to enter the space. It’s possible that mainstream financial involvement may change some of the ideals in the space, which have traditionally been geared towards decentralization. For example, cryptocurrency industry thought leader Andreas Antonopolous has long been skeptical of the much-awaited Bitcoin ETF.

He speculated that the model of investing in an ETF and allowing the backing institution to hold the actual cryptocurrency will give institutions excessive power when it comes to making network decisions such as forks and updates, possibly making Bitcoin less democratic.

Whatever happens, institutions seem poised to enter the cryptocurrency space in a big way, transforming and growing the ecosystem significantly. While cryptocurrency prime brokerages are a recent phenomenon, major trading entities are already using them to their advantage in the market today, taking advantage of the kind of sophisticated tools and services that were previously available only in mainstream finance.

Ready to experience the smarter trading tools and better price execution of crypto prime services for yourself? Claim your SFOX account now.

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