By Jon Matonis
Thursday, March 28, 2012
dark pools, market participants have the ability to execute large block trades without adversely impacting the price in either direction.
Based in San Francisco, Tradehill Inc. has relaunched successfully as
a business-to-business bitcoin exchange for institutional investors and
individuals qualifying as accredited investors. The original Tradehill
founded by CEO Jered Kenna in 2011 had operations in the U.S. and Chile
and maintained a consistent second position in daily trading volume
after Mt. Gox.
Offering both a transparent open order book and a dark order book, the Tradehill service Prime
will be critical for both large investors on the buy side, such as
funds and institutions, and commercial participants on the sell side,
such as merchant processors and bitcoin mining operators.
As “liquidity” and “market impact” can be synonymous in
many cases, the market impact, especially on price, is a key
consideration for those larger institutions that are regularly shifting
assets between financial markets. If a large trade is executed
incorrectly, the market impact can be several percentage points in
addition to the typical transaction costs of commission and/or spread.
“Whether you’re trying to sell a large amount of bitcoin above
market, or trying to buy without losing your shirt to slippage, dark
orders on the Prime platform provide an important tool for larger
traders,” said Kenna.
In one week, over 100 new accredited investors signed up for
Tradehill Prime. The company requires a $10,000 minimum initial deposit
(in bitcoin equivalent or U.S. dollars) and dark orders will be priced
in BTC, trading in micro-lots of $1,000. New clients also receive a $75 account credit to test the integrated trading platform on the open order book.
Tradehill is a U.S-based exchange that falls within the definition of
FinCEN’s regulations for virtual currency exchange operators.
“Bitcoin’s primary use is value transmission and financial technology in
the U.S. is a very regulated space,” according to Tradehill COO Ryan
Singer. The company has anticipated this regulation and the recent
guidance from FinCEN “really helps the startups in the space build a
compliance game plan,” he added.
In offering dark pools of bitcoin liquidity within an exchange
infrastructure, institutional clients gain the benefits of anonymity and
non-display of orders but without losing any of the efficiencies
associated with trading on an exchanges’ public order books. With
bitcoin, it is difficult to gauge how much large-block trading occurs
off a publicly visible exchange. By comparison, research firm Tabb Group estimates that off-exchange and dark pool trading in the U.S. equity markets accounted for 32% of trades in 2012.
Emma Quinn, AllianceBernstein’s Head of Asia Pacific Trading for equities, says
” We use dark pools to access liquidity for orders we would not
normally place in the central limit order book. I think dark pools aid
price discovery. There has to be post-trade transparency but once that
happens you’ve actually got more transparency on a market than you
MIT Professor of Finance Haoxiang Zhu agrees with that assessment writing that “dark pools can improve price discovery in open exchanges.” He also said,
“Adding a dark pool alongside an exchange tends to concentrate
price-relevant information into the exchange and improve price
discovery. Improved price discovery coincides with reduced exchange
This is precisely where the Bitcoin market needs to be heading and it
is a necessary prerequisite for Bitcoin’s evolving role in global
trade. Wholesale trading exchanges like Tradehill Prime represent an
evolution from the floating-rate and fixed-rate retail exchanges. They
can also be considered a precursor to bitcoin-based forex markets as well as more sophisticated derivatives markets for bitcoin futures and options.