Thread by @ramahluwalia

1/ EDX Markets, a non-custodial exchange, went live today.

That sounds like a contradiction right?

Here's background on EDX and initial thoughts.

2/ EDX Markets is a non-custodial cryptocurrency exchange that launched in 2022.

EDX is backed by Citadel Securities, Fidelity Investments, and Charles Schwab, Virtu and others​​.

3/ Since its inception in September, EDX has facilitated trading in Bitcoin, Ethereum, Litecoin, and Bitcoin Cash.

The exchange operates a marketplace, enabling firms to negotiate prices and execute trades.

4/ The exchange facilitates the matching of buy and sell orders, akin to the role of a traditional exchange like NASDAQ or NYSE.

The critical distinction is that EDX does not handle customer assets directly thereby mitigating certain types of custodial risks.

5/ The non-custodial aspect of EDX refers to its settlement process.

Unlike traditional exchanges that require customers to deposit assets (crypto) into wallets controlled by the exchange, EDX plans to use third-party banks & a crypto custodian to hold customer assets.

6/ The actual exchange of assets happens directly between the firms involved. This is how the 'non-custodial exchange' contradiction is resolved.

These trades are settled through the transfer of crypto & cash between firms.

7/ EDX plans to streamline settlement with the introduction of a clearinghouse later this year.

Notably, EDX has not explicitly stated that it seeks to operate as a Alternative Trading System.

I couldn't find a filing for this on Edgar

8/ The backers behind EDX are telling. Schwab/Fidelity are the largest consumer retail brokers in the United States.

Citadel and Virtu are the leading electronic market makers.

There's no mention of Nasdaq, NYSE, ICE or the legacy investment banks as investors.

9/ Digression: Citadel and Virtu are relative newcomers to Wall Street.

Their business models use technology to upend the way business is done by distintermediating traditional over-the-counter market making desks.

10/ In 2018, Citadel rolled out a CLOB (Central Limit Order Book) for Treasuries - a big deal in Fxed Income

Old-school fixed income trading desks benefit from opacity (over-the-counter, not electronic, no best bid/best offer, no order book). The CLOB is premised on transparency

11/ The Citadel CLOB impact was mixed.

Citadel's move was disruptive in that it sought to introduce a new trading paradigm in a market that had been dominated by large banks. This was seen as a potential threat to these banks, who stood to lose market share.

12/ There are factions on Wall Street with their own interests. Classic Wall St prefers OTC trading and opacity.

Citadel, Virtu, MarketAxess et al prefer to compete in transparent liquid markets.

Digression end.

13/ Back to EDX.

EDX avoids directly serving retail investors. Paradigm is an EDX investor - and also a backer of Coinbase.

EDX caters to institutions, providing API-based trading access rather than a traditional front-end user interface.

14/ It's possible that EDX may have aspirations to evolve into a Regulated ATS and ultimately a 'National Securities Exchange' (think Nasdaq or NYSE).

I'm speculating here...but the approach is awfully consistent with that patten. And that would be good for crypto markets.

15/ The longer-term aspirations for EDX might be to revisit Citadel's CLOB ambition and disrupt fixed income markets using crypto rails [5-year plan?]

EDX has not stated that ambition - but the inclusion of Schwab/Fidelity means there's a lot one can do.

I am speculating.

16/ At the same time, I do agree with @CampbellJAustin's take that the machinations to fit into the current regulatory framework.

*You don't need a clearinghouse to settle trades with blockchain*

That reflects on the current regulatory framework not on the EDX initiative.

17/ Segregation of Duties

EDX is applying federal securities laws to crypto

By utilizing third-party banks and crypto custodians for asset custody, EDX minimizes conflicts of interest and protects against asset misuse like we saw in FTX, Celsius, and DCG/Genesis issues etc.

18/ EDX is one path forward that is constructive for the sector.

Another path (heavy lift) remains a decentralized prime brokerage model.

https://twitter.com/ramahluwalia/status/1658076237296721921?s=20

20/ Assorted additional context:
- Why those 4 tokens? Least likely to be deemed securities.

- Historical fact: the Big Banks (JPM, GS, etc.) were opposed to decimalization initially. Stocks were traded in 1/8ths and 1/16th etc. The 'new faction' was comprised of folks like… twitter.com/i/web/status/1…