Much is discussed about Digital Identification, and the need to protect one’s Digital ID.  Crypto Exchanges use Digital ID security measures as marketing tools versus their competition.  But maybe they should be worried about losing their own identities.

I have stated a few times that the industry of crypto exchanges is following a similar trajectory to the FX brokerage industry of the last 15 years; its just happening at crypto-speed.  And once again, it’s like I am seeing a remake of a movie to which I saw the original. 

This time the specific nuance is that of front-end aggregation platforms.  There are a growing number of firms that are making front-end trading platforms (UnionExchange, MasterDax, Terminal.Global, etc) that can hook into all of your exchange accounts (Binance, Kraken, Bitfinex, etc) and then show you aggregated liquidity, propose real-time arbitrage opportunities, or expose different volume depths.  The exchange operators so far seem not to care because as they see it, they are still holding and monetizing client assets and getting the trading volume.  They do not care if it is going through an intermediary platform.  At the end of the day it is the trader paying the extra fees to the intermediaries.  But the exchanges do not see the insidious long-term plan of these aggregation platforms.

The dominant platform in the retail FX/CFD world is the MT4 platform from a Cypriot company named, MetaQuotes.  The MT4 platform rose to dominance once it was offered by a few of the largest global brokerage firms starting in 2007.  The MT4 platform is just now giving way to the MT5 platform, but it is widely accepted in the industry MT4/MT5 sees 85% of retail order flow for FX/CFD’s.  Similar to the current situation for exchange operators, MetaQuotes did not initially see the problem of third party application front end providers on the MT4 platform.  Starting in the late 2000’s a number of application providers to the FX industry recognized MetaQuotes’ MT4 dominance and decided to integrate their front end platforms into the MT4 Manager platform (think “matching engine” in exchange terminology).  For a while, all was well.  These third-party applications were bringing in new traders to the FX world and volumes were improving so MetaQuotes did not mind.  But when a few of the third-party applications decided to create their own back-end platform and replace the MT4 platform completely, MetaQuotes realized they had allowed these aggregation-platform intermediaries to gain a stronghold over the traders.  

Retail traders do not know, understand or care about what happens on the back end.  They did not even understand the terminology of the back end of a trading platform; Matching engine? Latency? API? A-Book?  B-Book?  Retail traders want a simple interface with their trading platform, and once they learn how to use one interface they do not want to change.  This was the lesson learned from the large brokers’ failed attempts to transfer their MT4-born clients to proprietary platforms.  Retail traders just knew the front end they liked and were used to.  When the aggregation-platform intermediaries decided to build/buy their own matching engines, Metaquotes lost the order flow. 

To their credit MetaQuotes acted decisively when they realized their vulnerability.  They terminated agreements with certain third-party providers and even sued one or two in court with a lot of publicity.  In the end, MetaQuotes shut down all their front-end “partners” so that traders once again would only see and use the MT4 front end platform which has allowed MetaQuotes’ dominance to continue to this day. 

I expect the large crypto exchange operators will soon see the same thing happening to them.  At first they will not mind these aggregation platforms as some of the downstream providers’ features will add volume to the exchanges.  But as soon as one of these aggregators decides to become an exchange unto themselves and cuts the existing exchanges out of the value chain, these giants will wake up and act to take back their traders.

Steve Leahy, Managing Director, ntrd

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