Why Round the Clock Markets Are Turning Market Makers Into Critical Infrastructure

You have said capital markets were built for a world that opened at eight and closed at half past four. What changes when markets trade around the clock?

If you designed and built capital markets from the ground up today, there are certain things that would not exist in the mainstream markets that open at a certain time and close at a certain time, when the news cycle revolves. 24/7 is not how you would do things from a fundamental perspective. One of the great promises of digital assets and cryptocurrency has been that we can rebuild some of these elements, and I think we are now beginning to see a convergence where a lot of the traditional capital markets world is beginning to accept those changes and adopt them. That is happening rapidly.

In plain terms, what does a market maker do?

A market maker provides liquidity, which is a fancy way of saying that in any market, someone might want to trade at a time when there is not a natural person to trade against. A market maker is often there providing orders to buy and sell within that market so that someone can transact when they want. It is about the immediacy of risk transfer and the immediacy of price discovery. Most market makers operate across thousands of instruments and thousands of different venues. Providing liquidity is the core of what they do, and they extract a tiny edge on most transactions, or at least they try to. That tiny edge can be seen as the fee they are paid for being present when someone else might not be.

Chainalysis says institutional platforms in the UAE grew 75% to 11.7 billion dollars. Why are market makers growing so fast?

Market makers, as a part of capital markets infrastructure, have seen the region having foresight in terms of regulatory clarity that has not necessarily been there in other areas of the world. The ease with which you can set up a company has also been very beneficial to people who want to move quickly with this new technology, and market makers are part of that. We have seen our competitors and other parts of the infrastructure space look to the region and say, this regulation makes sense, there are other favourable conditions here, and we want to be present as well. At a time when, particularly in the UK where we are based, regulatory clarity has not been at the forefront of the regulators’ minds, the regions that have had it have a distinct advantage.

Clients will want transparency. What does transparent market making look like?

It boils down to the way market making, particularly in digital assets, has been perceived for a long time. When tokens launch, they are issuing an asset, and a lot of the time in cryptocurrency they have engaged a market maker to provide liquidity. That is the function we just described. They provide two sided orders so that the community interested in trading the token can do so with minimal slippage and, ideally, at the size they want. However, because of the lack of regulation and some badly aligned incentives, some of the market makers involved have not behaved in the best interest of the token issuer or the community. That needs to change, and it has been changing rapidly over the last two or three years. A lot of the better market makers now provide absolute clarity about what they are doing with assets at a particular time and how that is beneficial to the issuer and its community. LO:TECH was founded on the principle of providing complete transparency around our market making activities, and we have earned a lot of goodwill as a result.

Money tends to go where the rules are clear. Why does regulatory clarity matter so much to institutions?

It has always mattered, because uncertainty and lack of clarity are hard situations in which to build a business. For a long time, prior to the current US administration, many US builders in the digital asset space were leaving America to build elsewhere because of the lack of clarity and the fear of punitive, potentially backward looking approaches to regulation. With clarity comes a degree of certainty, particularly when you are growing businesses across retail and institutions and dealing with people’s money. It is not that digital asset companies have tried to avoid regulation. There has been a vacuum of regulation until the last two or three years. With regulation comes some responsibility and oversight, but also clarity, and clarity reduces risk for entrepreneurs and companies that want to build in the space. For us, building under a regulatory umbrella has always been the approach, and places that have good regulation, well thought out and done in consultation with the industry, are definitely seeing the benefits now.

The UAE’s crypto economy grew 32% over the past year while the rest of MENA shrank. What explains that?

Some of the things we just talked about, regulatory clarity, but there are also different flavours of where the crypto economy has been growing and succeeding. In the last two years we have seen a huge amount of interest in how stablecoins can drive efficiencies across payments and settlement cycles. Other parts of the new digital economy have not necessarily been at the forefront. We have seen a huge decrease in the amount of token issuance, but a lot of interest in how AI might be used within the blockchain ecosystem. So depending on where institutions are based, and which regulatory regime they have chosen to domicile under, you might see different levels of growth.