Omniex says it has gone live with 20 institutional investors using its platform for trading and execution in digital assets.
“This kind of service is taken for granted in other asset classes,” said San Francisco-based John Burnett, co-founder and head business development. He says despite the continuing bear market for crypto-currencies, Omniex is among a handful of players providing the infrastructure to enable hedge funds and other institutional investors the functionality they’d expect in classical assets: order- and execution-management systems for trading.
The vendor also has portfolio- and risk-management capabilities, but its initial focus is on the execution side. Its selling point versus competitors such as Caspian, a crypto adaptation of Toro’s classic equities trading business, is it is crypto native.
“We’re designed specifically for crypto,” said co-founder and CEO Hu Liang.
Hu and Burnett are both ex-State Street, and have brought that classical custody and data experience to digital assets.
Burnett previously ran State Street’s blockchain businesses, representing it in consortia such as R3 and Hyperledger, as well as leading American Express’s internal research into Bitcoin.
Liang was previously State Street’s senior v.p. for its emerging technologies center in San Francisco, after serving as Asia head of its then-newly created State Street Global Exchange, it’s big-data initiative.
In July, Omniex announced two former U.S. regulators had joined its board as advisors: Arthur Levitt, former chairman of the Securities and Exchange Commission; and Sheila Bair, former chairwoman of the Federal Deposit Insurance Corporation.
The company’s founders say it is likely at some point State Street or other major custodians will enter the space – if they have a mainstream investment firm demanding the service. But for now Omniex is building the capability for institutions themselves.
“It’s hard for asset managers to pitch L.P.s if they have to do all of this themselves,” Burnett said.
What investors say
The space, they say, is bigger than it looks.
For example, it is working for hedge funds as large as $25 billion client portfolios. Such institutions have to do a lot of their own homework about digital assets. “The big-name buy sides won’t enter until there’s a State Street to service them, but a $25 billion fund will,” said Liang. “They’re educated enough that they don’t need the bank’s balance sheet to trade.”
One such user, referred by Omniex, spoke with DigFin from New York. He agreed. He runs a macro hedge fund and has created a special-purpose vehicle for crypto. He says his firm has recently raised $50 million for digital assets, and expects it to raise another $200 million by the close of the year.
He says institutions took notice in October following reports that David Swensen, manager of Yale University’s $30 billion endowment fund, had invested into two dedicated crypto funds. One was Andreessen Horowitz’s inaugural $300 million crypto fund, which closed this summer; the other was by Paradigm, a pure crypto player set up by a co-founder of Coinbase, Fred Ehrsam, and Sequoia Capital partner Matt Huang.
“If Swensen and Andresseen are doing this, then every institution’s going to follow,” said the hedge-fund manager. He said he signed up with Omniex for its front- and middle-office capabilities because he liked their mix of financial experience and the platform’s crypto-native build.
A second Omniex user based in Boston says his firm is using the platform to provide net settlement for its own trades: his shop has been investing in crypto for four years already and built a proprietary trading capability.
He says the poor quality of infrastructure to trade crypto is putting off institutions. “It’s about how badly you want to put a trade on,” he told DigFin. But he believes net demand among institutions is growing, saying his firm’s AUM has risen thanks to some endowment-fund allocations – although he expects many 2017-vintage funds tied to the ICO bubble will shut down soon.
Burnett says a lot of the work is more basic than just a crypto version of an OMS and EMS. It has to create and maintain APIs with many crypto exchanges, as well as with banks and administrators providing services to investors – often by relying on the founders’ personal networks in capital markets and investments.
“The infrastructure [for crypto] is non-existent,” Liang said. “The cost to an investment firm to build it is vast…Since we launched, we’ve learned how brittle the infrastructure is.”
The Omniex founders argue the fast-changing nature of the digital-asset landscape is one reason why a State Street or other classic service provider would struggle in the space. For a bank to change an API requires weeks of notice periods and testing; whereas for Omniex, maintaining that connectivity across multiple exchanges is a daily task.
So far Omniex’s founders say volumes remain sporadic, with no history to infer where capital is being deployed or what type of trading algorithms are being developed. Volumes need to grow for those things to become apparent. Other aspects such as arbitrage, securities lending and derivatives in crypto need to evolve.
“We’re hardening the infrastructure, so we’re ready when the market heats up again,” Burnett said.
How soon that happens is anyone’s guess. The New York investor is bullish, expecting a wave of institutional money in 2019 to replace the bombed-out retail segment.
The Boston investor, who has been focused on crypto-currencies for a while, sounded more ambivalent, noting that use cases such as stable coins are attracting investments but have yet to prove themselves. “Crypto assets are going to remain hard to price for a long time,” he said.