Highlights from the CME's bitcoin futures roll progress report for May 2018.
- CME Group Bitcoin futures for May (K) contract expired this morning. The Bitcoin Reference Rate settled at $7,493.94 and trading in May futures straddled the theoretical rate by $10 early in pricing period and $5 in last 10 minutes of pricing period. CryptoFacilities publishes the Reference Rate and more info can be found here.
- Calendar spreads between May and June Bitcoin futures traded in line with theoretical price during the month.
- Most spreads were legged on our desk because of limited liquidity in the CME Bitcoin futures calendar spread product.
Lowlights & Potential Problems
- Settlement not ready for “Big Time” traders. We followed The Bitcoin Reference Rate settlement process very close the last 2 settlement cycles. The 4 exchanges that represent the settlement index is GDAX, Kraken, Bitstamp and ItBit. I’m concerned around the lack of liquidity and size being traded on the representative crypto exchanges. A small trader with a modest bank line could easily manipulate the settlement price. We are seeing a few “fishy” trades happening on a few of the reference exchanges. Could be coincidence or it could be “market maker” games.
- Institutional buy-side firms need more displayed liquidity on $CME exchange. Block desks are abundant and liquid but market impact costs on block trades are estimated around 50–75bp per trade — that’s potentially 10–15% annual market impact costs.
- Profit margins shrinking for market makers and prop traders.
Trends
- More regulation for US cash exchanges. Cash exchanges will have similar regulatory requirements as stock and futures exchanges and OTC platforms. Bad actors will not SURVIVE.
- Cash exchanges transaction fees are falling fast. A year ago, Bitcoin transaction fees were around10–20 basis points (bp) per notional value of Bitcoin and are now between 5–10bp. CME futures cost around 2bp to trade depending on your Futures Commission Merchant (FCM).
- Institutions adopting #crypto asset class. Hedge funds active in crypto space is reported around 250 new hedge funds. Estimated assets under management (AUM) is close to $7billion.
- Crypto trading is maturing and prop trading profit margins falling fast.
Suggestions:
- Futures exchanges should consider a physically settled contract. I think a regulated exchange wallet that is owned by regulated exchanges could be the answer. Use Option Clearing Corp (OCC) or DTCC as blueprint.
- Settle futures on pricing period in CME futures trades (maybe use first 2 active contract months and carry calculation). A lot of solutions.
Additional source: C2 Capital Management.