Decoding EDX Markets! The disruptive weapon of Wall Street's new trend? Is the CEO of EDX a former senior employee of Citadel?

What is the background of EDX Markets, an exchange supported by Wall Street giants Citadel, Fidelity, and Jefferies? What are the potential development directions and impacts of EDX Markets? Is EDX Markets also a competition between the old and new forces on Wall Street?

What is EDX Markets?

EDX Markets is a non-custodial cryptocurrency exchange established in 2022. The exchange has received investments from traditional institutions such as Citadel Securities, Fidelity Investments, Charles Schwab, and Virtu, as well as newer institutions focusing on cryptocurrencies like Paradigm and DV Chain.

• EDX Markets has a strong connection with Citadel Securities, as its CEO Jamil Nazarali was a senior executive at Citadel Securities for ten years, responsible for business development.
• EDX Markets' Chief Strategy Officer Jeanine Hightower-Sellitto has previously worked at a major brokerage solutions company and the cryptocurrency exchange Gemini.

According to public information, investors in EDX Markets include:

Understanding the Differences Between EDX Markets and Traditional Exchanges: Non-Custodial, Pure Trading

• Trading only non-securities cryptocurrencies: EDX offers trading for Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), and Bitcoin Cash (BCH).
• Acting solely as a trading venue, not holding user assets: EDX is responsible for order matching but does not custody user assets, similar to traditional stock exchanges.
• Emphasizing non-custodial services: EDX uses third-party banks and cryptocurrency custodians to safeguard user assets. After trades are matched on EDX, settlement of cryptocurrencies and cash is handled between brokers.
• Not serving retail investors but open to broker participation.
• EDX plans to establish a separate clearinghouse.

Understanding EDX's Features: Supported by Wall Street giants Citadel, Fidelity, Charles Schwab, EDX Goes Live This Week

EDX May Become a Compliant Alternative Trading System (ATS)

Ram Ahluwalia, CEO of asset management company Lumida, commented that EDX may aim to become a regulated Alternative Trading System (ATS). ATSs are regulated trading venues in the U.S. that are not national exchanges. Once compliant as an ATS, it could potentially evolve into a national exchange like Nasdaq or NYSE.

EDX Poised to Disrupt the Fixed Income Market, Fulfilling Citadel's Ambitions

Ram Ahluwalia believes that EDX may be looking to challenge Citadel's ambitions in the Central Limit Order Book (CLOB) through cryptocurrencies to disrupt the fixed income market.

The legacy fixed income trading desks benefit from opacity, over-the-counter trading, non-electronic trading, lack of best bid/ask prices, and absence of order books. Central Limit Order Book (CLOB) is based on transparency.

CLOB was proposed by the U.S. SEC in 2000 but was ultimately opposed by brokerage firms.

Ram Ahluwalia sees Citadel's move as disruptive because it seeks to introduce a new trading paradigm in a market dominated by large banks. This is seen as a potential threat to these banks as they could lose market share. Wall Street has various interest groups, with traditional players favoring OTC trading and opacity, while Citadel, Virtu, MarketAxess, among others, prefer competition in highly transparent markets.

The Flaw in EDX's Model: Clearinghouse?

Ram Ahluwalia states that while the idea of establishing a clearinghouse aligns with current regulatory frameworks, he acknowledges the irrationality of this notion: there is no need for a clearinghouse to settle blockchain transactions. He believes this highlights the outdated nature of current regulatory frameworks.

The Impact of EDX: Compliance Paradigm

Ram Ahluwalia sees EDX's application of U.S. securities laws in the cryptocurrency space, segregating trading, custody, and settlement to prevent conflicts of interest and asset misuse, as a constructive path for the cryptocurrency industry. He suggests another path is decentralized prime brokerage, but it poses more challenges.

Another Story of EDX: Wall Street Power Struggles

Ram Ahluwalia notes that major banks like JPMorgan and Goldman Sachs initially opposed decimalization in U.S. stocks, which changed from fractions like 1/8 and 1/16 to decimals in 2000 under the influence of new Wall Street players such as Knight Capital, Citadel, DRW, and WorldQuant, supported by SEC chairman Arthur Levitt.

Furthermore, Wall Street investment banks have long benefited from opaque bid/ask prices in a limited competitive environment with high spread profits. The advantage of Citadel, Virtu, MarketAxess lies in heavy investments in technology, speed, and talent.

Ram Ahluwalia sees the two camps as representing competition between banks and technology, each having advantages in regulation and technology. For instance, online brokerage Robinhood's order flow payments are in collaboration with Citadel. Citadel has a history of performing well in competition against traditional Wall Street powers.