Crypto Exchanges Crack Down on Prime Brokers, Raising Concerns About Market Efficiency
The crypto world is buzzing with talk about a new trend: major exchanges like Binance and OKX are tightening their grip on **prime brokers**, those firms that offer their clients lower trading fees. Some market participants are worried that this move could stifle the growth of the crypto market, making it less efficient and appealing to institutional players.
Binance was the first to make a change, disabling prime brokers from utilizing their tiered commission structure to lower their own costs and offer discounts to their clients. This change, rolled out last month, affected their LINK Plus system. OKX has followed suit, limiting access to their VIP commission program. Both exchanges claim they are taking these steps to create a more level playing field for their users and ensure transparency around prime brokers’ client identities.
A Move Backwards for Crypto Market Efficiency?
Some industry players, however, see this as a step in the wrong direction, particularly for the development of a more efficient crypto market. The crypto market was initially built to cater to retail clients, hence its difference from traditional finance. Prime brokers offer institutions a simple, bank-like service, holding their funds and assets and facilitating swift transactions across various platforms.
Prime brokers also offer credit, allowing traders to quickly adjust and modify their positions, with all transactions being settled within a day or two. Crypto’s ability to eliminate intermediaries and enable real-time settlements via blockchain means that large players with multiple simultaneous trades need to fund all their positions in advance, which is where prime brokers come in.
By restricting prime brokers’ access to lower fees, exchanges may be inadvertently making the crypto market less attractive to institutional investors. “The exchanges have decided that they don’t need intermediaries. They can provide credit too, right?,” says George Zarya, CEO of Bequant, a prime brokerage firm serving crypto clients. “But they can only provide credit against positions that are based on their exchange. They can’t provide portfolio margin, which includes your positions across the market. Essentially, we’re moving towards less capital-efficient markets.”
Exchanges Prioritize “Liquidity Capture”
Brendan Callan, CEO of Tradu, a new crypto exchange owned by investment bank Jeffries, believes the move is part of a larger strategy by major exchanges to “capture liquidity,” creating a captive audience model where trading volume increases as users are forced to buy and sell on that exchange.
Callan points out the resulting price discrepancies on popular pairs like BTC/USDT, highlighting the differences in prices between exchanges. This would be considered “crazy” by a traditional currency trader, as all liquidity providers are subtly being steered towards prime broker accounts so they can manipulate the market on any other exchange.
This creates a scenario where there is “a ton of friction around counterparty risk thresholds,” according to Callan. “But the crypto exchanges are pushing for this because they want that capture. They want you to have to come in and out of positions on their exchange because that increases their volume, but it comes at the expense of the quality of their liquidity.”
It remains to be seen how these changes will ultimately impact the crypto market. The move towards less efficient markets and increased capture of liquidity could hinder the growth of the industry and may discourage institutional participation. Time will tell how this evolving landscape will shape the future of crypto trading.
