WallStreet has been trading crypto for while now, but it's not what you think -- my experience interning at one of these firms
I have been a stern supporter for cryptocurrencies for a long time and enjoy visiting this subreddit. But recently, I have been seeing a lot of misleading and downright inaccurate posts regarding Wall Street's role in the crypto trading space and wanted to share what I saw when interning at one of these firms as a college student.
And when I say "these firms", I'm not referring to your typical big banks such like JP or Goldman, as they are not allowed to engage in such proprietary trading activities since the introduction of Volcker Rule. Rather, I'm taking about what are called "prop shops", which are firms that trade their own money using algorithms at very high frequency such as DRW, DE Shaw, Jane Street, etc (look them up).
First, let me break this to you -- many prop shops have been trading cryptocurrencies for a while now, and they are damn good at it. The way these firms profit off of cryptos are completely different than what individual investors usually do (buy and hold, day trade, etc). The main way that they make money is via market making activity, which is also known as liquidity provision. Simply put, the firm will que up orders on both sides (buy and sell) and when the order gets filled, they make the spread between the two prices as profit.
What if the price moves? Well that's when the magic happens. Their lightning speed algorithms are able to que up orders on the next price level with microsecond speeds and they are able to 'scratch' their existing position to avoid losses. If that's not enough, many famous crypto exchanges (I wont be naming names here) give prop shops preferential access to their platform so that they can get their orders in first. Furthermore, exchanges also pay them what is called 'liquidity rebate' which is basically a flat fee per trade to prop shops in exchange for the liquidity that they provide.
Another way that prop shops make money is by trading spreads and arbitrages between exchanges that are spotted by very quick and advanced algorithms that their team of quants (quantitative analysts -- more commonly known as 'rocket scientists of wall street') develops. These trading activities are completely market neutral (meaning they dont care if the price goes up or down, they'll still make money anyway.
In the months to come, I predict that many more of these firms will enter major exchanges and try to profit from the heightened volatility of cryptocurrencies. Many of you might start to think that this is unfair to the average investor that we have to go up against these big guys with their alien technologies, but I would argue that their service is actually beneficial to the average investor. They improve market liquidity and simply allows you to trade at a much lower spread.
I hope this is informative to the community! Feel free to ask any questions that you might have.
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