The Pomp Podcast - #529: David Mercer on Institutional Trading Trends

Episode Date: April 7, 2021

David Mercer is the founder and CEO of LMAX Group, which owns LMAX Digital, the leading trading platform for institutional investors. In this conversation, we discuss why institutions want to trade cryptocurrencies, how important latency and infrastructure is, how LMAX Digital is servicing customers, and what trends David is seeing on a day-to-day basis. *This conversation audio is from a YouTube Live Q&A* ======================= OKCoin.com is the leading crypto exchange for both beginners and experienced users. You can fund your account in under 2 minutes, and get access to the most advanced trading engine, all while paying the lowest trading fees in the industry (0.1%). Visit www.okcoin.com/pomp and open your account today.  ======================= Exodus is an absolute game changer in the crypto wallet space, and we’ve teamed up to offer an exclusive discount for you, as listeners of the podcast. Sign up for Exodus today using my promo code Exodus.com/pomp. This is a no brainer for both newcomers and crypto heavyweights - go sign up today.  ======================= Pomp writes a daily letter to over 150,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at https://www.pompletter.com =======================

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. David Mercer is the founder and CEO of LMAX Group, which owns LMAX Digital, the leading trading platform for institutional investors. In this conversation, we discuss why institutions want to trade cryptocurrencies, how important latency and infrastructure is, how LMAX Digital is servicing customers and what trends David is seeing on a day-to-day basis. I really enjoyed this conversation with David and he obviously understands what he's talking about, so I hope you enjoy this one as well. Before we get into this episode though, I want to quickly talk about

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download or search Exodus on the App Store or the Play Store. Lastly, don't forget that I read a daily letter to over 150,000 investors about business technology and finance. I break down complex topics into easy to understand language while sharing my personal opinion on various aspects of each industry. You can subscribe at pompletter.com. Again, pompletter.com. All right, let's get into this episode with David. I really hope you enjoy this one. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp

as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. David, what's up, man? All I know is you read out all those locations, almost all of them sound better than a very rainy and a wet West London today. Dude, I'm in Miami. I don't know how you're hanging out in the rain out in London. I'm walking out. Awesome. All right. So let's jump into this for everyone who's paying attention on the live stream. We will take questions at the end. We're going to go for about 35, 40 minutes. We're going to have a conversation. So if you leave your questions,

I will do my best to get them answered. No promises of yes to big questions. David and I will not answer them. All right. Let's talk about your background, David, in terms of where did you grow up and how the hell did you get into finance? Good question. I grew up, believe it or not, born and bred in Belfast. So I grew up in Belfast in the seventies and somehow rocked up in London before my teenage years. And now I've been in London ever since. So I guess from there on how did i get into finance yeah i would love to tell you i had some great plan but actually i started off god help me being an auditor then i somehow ended up in an investment bank so i had effectively three decades of my career to date yes that's how old i am 10 years in investment

banking learning my trade uh 10 years outside of that basically in brokerage firms leaving capital markets for a little bit embracing the internet trying to run an online investor relations business and that's sort of learning how to run a business learning how to be an entrepreneur and the last decade have been lmax group which is uh i say originally focusing on foreign exchange so we operate five exchanges today and from day one it was in what we call fx you know the world's biggest capital market seven trillion dollars a day put that in perspective Bitcoin's market cap, even at 56,000, Pomp, is only $1 trillion. So foreign exchange trades seven times that every day. So that's what we've been doing for the last decade.

And the last exchange, the last of the five exchanges we launched was LMAX Digital, which we launched right into the crypto winter. You've got to be in it for the long term, guys. The crypto winter in 2018, we launched LMAX Digital. So there's a whistle-stop tour of me and LMAX Group. I love it. So when you think of LMAX Group, what are the other exchanges outside of the digital exchange? You got foreign currency, are there specific geography focuses, certain types of trading pairs? Why are there four other exchanges? Yeah, good question, actually. And I wonder whether that will translate into crypto going forward. So basically, we operate three exchanges in London, one in New York, one in

Tokyo. So in FX specifically, you operate, nothing ever happens on trading desks anymore, by the way. It's all algorithmic. It's the silent assassin now, which are algos trading with each other. And typically they're in data centers like the one we call NY4. So the New York center is actually in New Jersey. Right. So the one in London is actually further outside West London is in a place called Slough. I couldn't tell you exactly where the Tokyo one is, TY3. But so the reason for that is latency. Right. Very simple. Speed of light stuff. if you want to trade euro in in new york you're best to trade with other customers in new york or

in the vicinity right so there's fast links to chicago for example from there likewise if you want to trade in london it's probably best that you trade there so it's ultimately where people hold risk and where you exchange risk so it takes the round slip time is around 60 milliseconds between london and new york so that speed matters in foreign exchange and you hear a lot about hfts or we would call them non-banks or prop trading firms so if you ever read ever read flash boys you'll learn all about it so i wonder how so that's really the that's really how fx evolved and i mean i didn't invent that center it's just those are where the risk centers are london new York and Tokyo. I happen to think Singapore will probably take over as the Asian hub a decade from

now in EFX. And you try and service those customers. Most of the global players, most of the major banks and prop trading firms will trade in all three centers. Got it. And so what about crypto for the LMAX Digital? Is that just in one single physical location or geography? Yeah, so today, well, distribution-wise, it would be global. So, I mean, LMAX group has customers in 100 countries. So, I like to think a lot of them would also be trading digital. My overlap today, just facts and figures, 40% of LMAX digital customers trade another asset class with me. What that means is they trade FX.

But all the matching, so those silent assassins, if you like, currently happen in London, right? latency doesn't seem to be a big thing probably because of the if you like retail nature of the market in startup phase so people are trading longer term views it's not about milliseconds yet certainly not even in seconds mostly it's days and weeks and months so even the guys who are tech enabled can send their prices from new york chicago or singapore or hong kong and be pretty content the prices they're trading on i wonder if i'm honest with you anthony um what will happen going forward you know we're well set up to have matching engines all around the globe if you think about a defy world uh where latency becomes important for example where price discovery

becomes important right so how do you price that underlying asset i do wonder what will happen in the next decade. But let's hope it doesn't follow the expensive infrastructure route of traditional capital markets, but it's possible. And so is the thought process that maybe as more and more high frequency traders and kind of electronic trading comes into the market that may drive a greater desire for the low latency, and then that would force you guys to go just from matching everything in London to kind of those three hubs, or maybe even more hubs over time yeah i'm all pretty certain that will be the case um but by the way i think that low latency trading hft if you must benefits everyone in terms of liquidity provision in terms of precision in

pricing right so you see a lot of at the moment you see a lot of exacerbated exacerbated price dislocation market dislocation that starts from say a retail platform out of the seychelles or panama or hong kong or wherever it is and i think you need these guys to be playing in the market to have that precision of pricing to every millisecond certainly every second of the day and then i think that creates more opportunity for everyone all the participants in the marketplace at the moment you'd know probably better than me in this there's a lot of let's call it an inverted commas arbitrage in the market everyone thinks they found the arb between between the spot and the future, right? Or between this matching engine in London or New York or Chicago. In fact,

it's just credit spread, right? The ARB is so clear, I can see it with my naked eye. In foreign exchange, allegedly it exists. But if there's an ARB, it exists for a millisecond and it's closed up by someone in the market. That makes for an efficient market infrastructure and efficient pricing for everyone. And so when you think about that credit spread, explain that a little bit more, right? So this is something that you and I can say, hey, on one exchange, I can buy Bitcoin for, let's say today, $53,000. And I can turn around on another exchange and sell it for $56,000 and therefore I can make three grand. Yeah. That's what people are saying. And they're going to be, David is arbitrage. I'm going, well, it's not arbitrage, right? It's called

credit spread, isn't it? Because what you're having to do, it's really capital intensive. You're having to put your dollars or your tether in one location and your coin in another location. and you have to run both positions, and you're going, look, look at this. Now, you have to close it out. So how wide is the spread whenever you close it out on both exchanges? And are you sure they're both going to give you the coin and the dollars, right? Now, we know that doesn't always happen. And then you've got also, how long does it take you to get the Tether exchange?

How long does it take you to get the dollars back, right? Because people forget also, you know what the financing rates are today in the crypto market. So that can be hugely expensive if you're waiting three days for your dollars from some bank in Bermuda or the Bahamas. And I give you your coin immediately. Right. So you need to be able to turn it. So I think people need to be very careful about what looks like a price of normally in traditional capital markets. That price of is you pay for that through credit risk. Absolutely. Before we keep going, everyone who's watching right now, smash the like button. so more people can see David and hear all of his genius remarks. If you don't smash the like

button, then you can't be friends. So go ahead and do that so more people on the platform see it. David, what I want to talk about is LMAX Digital specifically. The legacy world, I'm not a fan of, obviously. In this new world, we're seeing cryptocurrency exchanges pop up, it seems like every day. How do you think about what you guys are doing and what the differences are to kind of the competition or peer group that have other exchanges? Yes. I envy you, right? And a lot of the guys like the tall fellas who are always on Twitter all the time, just to be a crypto evangelist, right? So I'm very envious. I guess LMAX Group and LMAX Digital, we straddle the two. I make no apologies for that. So we straddle traditional

capital markets, the status quo, and then hopefully the new market, right? So creating a crypto ecosystem and moving into DeFi. Now, it's important. We're going to need some of that plumbing. We're going to need some of that credit intermediation from traditional capital markets, right? We need institutions to really start trading this product, be it Bitcoin or any other coin, right? And we need their customers to get comfortable holding it, trading it. I'll give you the best quote ever. It's all very well, Anthony, that you understand wallets, that you understand how to secure your assets. It's all very well that you understand how to move your coin around the world and you're comfortable and understand those risks.

I had a very established customer of a large investment bank say the other day, I don't care. I don't want to know about vaults. I don't want to know about wallets. I just want access to the product i want to buy bitcoin when i think it's going up and i want to sell it when i think it's going down i want to trade it the way i trade the s&p the way i trade the euro so it's where our next digital comes in hopefully and guys like us so if you like i'd like to use the phrase dumbing down but making it fungible with other products they trade you want what you Anthony wants what every crypto fund in the street wants is you want some of the $110 trillion of assets under management to be put to work in crypto. To give you an idea, this is why I'm

bullish. This is why I'm a big fan of the market, personally why I'd be a fan of Bitcoin is the market cap of Bitcoin today is $1 trillion, as we discussed. If just 5% of the assets under management in the world were allocated to Bitcoin. Very simply, the price has to be $280,000, right, just to satisfy that demand. So we need some familiar infrastructure where not everyone has to be an expert in blockchain. So specifically, we came in to help oil those wheels for existing institutional customers, not that familiar with the blockchain, perhaps a time poor, but want to allocate some of their portfolio to the crypto ecosystem. And I think you're starting to see that today.

I mean, look, I take my hat off to the retail platforms out there. Some very famous ones go into listing in the next week or two. They service a segment of the market. You know, they have 43 million customers. I have a few hundred, but those few hundred have access to trillions of dollars that could come in to the crypto ecosystem and benefit everyone, benefit Bitcoin, benefit everyone that believes in crypto.

So hopefully that's the gap we're trying to fill. I want everyone to do well in there. I want other people like prime brokers to come in. I want big names. You saw some announcements last week. I want big names to come in in the custodian space. Why do I want that? Just because that guy that says, David, I don't care,

just puts his money there. And hopefully that on-ramp then hits LMAX Digital or other exchanges and they start to trade. So what's really interesting to me is you sit in this like fascinating seat, right? You've got a great legacy business in foreign currencies and kind of a whole FX market. You now have this crypto exchange. You're able to tell your existing clientele who are some of the largest asset managers in the world, the most professional traders, hey, we have a crypto exchange. You should go and you should trade cryptocurrencies on that.

We're going to use our state-of-the-art kind of low latency technology. and exchange infrastructure, we're going to apply to this new market, go trade. Is there ever a conversation about maybe putting them together? So allowing somebody to trade everything from one single location or one single exchange, or is there a benefit to actually keeping them separate? So you've got a crypto specific exchange and you kind of have your other exchanges that have no crypto on them. 100% hit the nail on the head. I guess that's why you have the the followers you have. I've done this once or twice. You can't tell. My personal view is it's a partition wall between traditional capital markets and crypto today. That was done for a

reason. If you like, that was also done at LMAX Group. So LMAX Digital sits as a separate group under LMAX Group and distinct from LMAX Exchange. For me, I view Bitcoin as an 81st currency pair. You want to trade DollarMix, you want to trade EURUSD, you want to trade the S&P, you want to trade NASDAQ, you want to trade gold, oil, you want to trade Bitcoin, you can do that. Actually, without trying to confuse your viewers too much, I have a regulated NTF, regulated by the FCA, and I have regulated instruments that are crypto-friendly there. So you can trade basically the leveraged Bitcoin dollar, Ethereum dollar right now, today. So it's already in one spot. I think we need the regulators and the bank regulators to have some approvals in place. And then I think in 2025, you'll trade all my currency pairs alongside Bitcoin, Ethereum, Polkadot, whoever knows what's next.

I would love a scenario where you trade Bitcoin against everything. And I think we can help deliver that because one of the good things about LMAX Digital is if you trade foreign exchange with me, it's the same software, it's the same API, the same market data feed. So I've got 10 global investment banks today taking my LMAX digital market data. Now, they're not trading yet because they're waiting for either internal or external approvals. But down the line, it's as easy as flicking a switch for them. So right now, I think because of regulatory constraints, because of some wariness in the market, not everyone wants to touch crypto yet. We keep it separate. But the benefits down the line are to keep it separate so that if you don't attach it, you're not tied by that brush. But down the line, the benefit will be, hey, come to

LMAX Group, trade it all in one place, be that London, New York, Chicago, or Tokyo. Makes complete sense. As we think about this, talk to us about kind of what's transpired so far. So you and your team decide to launch LMAX Digital. You launch it right into the teeth of the bear market. You're still here. You're still standing. So kudos to you, probably being rewarded over the last couple of months for all of that pain that you took in the beginning. But how is it going so far? Any data or numbers that you can share with us in terms of how LMAX Digital is doing in the institutional adoption? Sure. So I think most importantly, for you and for I and for everyone, it's the most fun I've had in capital markets,

the most fun I've had at LMAX, right? So the last five months have been a lot of fun. Now, when we launched it in 2018, we launched it, believe it or not, on demand from our institutional customers. Very simply, they said, David, we need some institutional industrial grade infrastructure where I can exchange risk with like minded participants. That's it. We listened to them. It overtook some other priorities I had within the group about expanding our reach in FX products. And we put it out there just as Bitcoin, of course, started to crash. But the good news is I always think exchanges take anywhere between two and five years to know whether they're going to succeed. And so we just came in. We were patient. We went for the long term opportunity. We saw what was happening happening underneath the surface.

I didn't know whether the pump from pump was going to happen in December 19 or December 20. but then when it happens i keep plugging in every month we had new users new banks new taking our market data new prop trading firms and connecting and they're not trading very much new brokers connecting not trading too much then suddenly bang so 2020 in total we traded 117 billion worth in q1 2021 we've already traded more than that in january this year we traded over 60 billion dollars worth of crypto so uh average average daily volumes of over 2 billion a day of crypto where does that come from by the way it makes me look dumb because i just put in a budget to the board and they're going well david how come you're wrong by 300 well okay i didn't

know Anthony was going to pump it up. But that's what happened. So we're pretty happy with what happened. What I would say to everyone, and a note of caution to the market out there, is that I'm giving you dollar numbers. And everyone in the market's doing that. But Bitcoin did most of it itself, right? The closing price was 29 figure, as I would say, 29,000 in December. It doubled to 58 000 so by doing nothing your volume doubled what i look at though and this is key for me what i look at is the average coin traded the average coin traded last year in lmax digital was 600 000 coins a month right this this year to date the average coin traded is 1.3 million so forget my dollar notional because i'm just going to tell you yeah it's four or five x but

But 2x of that should be taken care of by the price rise. So we're happy. I think what's important, though, Anthony, for me, for LMAX Digital, for the market is wherever you are in the marketplace, you want to be in that position in five years' time. We're just getting started in terms of the crypto ecosystem, the crypto market, and at LMAX Digital. uh i'm certain you know we did i think 10 of the legitimate spot market in december and december and january i want to still be 10 i want to be the de facto institutional exchange

whenever this market is 10x and believe it or not i think 10x is only a few years away 100x is my is my uh forecast and when we're talking 2030 and beyond so you think that bitcoin when 100x would be $5 million per Bitcoin? 100x, sorry, in terms of Bitcoin is a million dollars for sure. It's a million dollar asset. So that's for sure. But I think the whole crypto ecosystem, I just look, so I'm a trading volumes type of guy. Okay. Explain this further. Okay. So market cap of Bitcoin today, $1 trillion. FX market, $7 trillion traded every single day. legitimate spot market legitimate spot marketing crypto today you're talking 30 billion okay if you tell me 50 billion i'm not going to argue too much with you right 100 times that is only

3 trillion there's only five or 100 times 50 is only 5 trillion is that possible a decade or two from that i think it's inevitable certainly when you look at let's look at gold people talk call Bitcoin digital gold. The market cap of gold is 10 trillion, 10 times Bitcoin. It trades today around 300 billion a day. So 10 times what the legitimate Bitcoin market is or crypto market is. I think crypto and Bitcoin will overtake gold three years from now. And I can't see why it It doesn't when it's looking like it becomes a an asset that traditional investors, money managers, asset managers will hold in their portfolio, a traditional an asset which every corporate treasurer is going to have. You know, you ask about me. It doesn't matter whether I'm an evangelist or not. I'd be dumb not to have Bitcoin as part of my treasury system today. You know, we allocate only 5% to 6% of our assets to Bitcoin because we're not a fund, right?

But if I'm going to hold it in dollars and euros that pay me nothing and sterling that pays me less, right, then I've got to hold some. I've got to hold some in Bitcoin. So, yeah, 100x a decade or two decades from now, 10x literally, I think it's a bit touching distance, right? We'll talk before 2025 and it'll be 10x for sure. So this is fascinating to me, right? You come from the traditional FX world. You, by all measures, at least from what I understand, are not what I'd call like a Bitcoin luddite or a crypto luddite, right?

You're not banging the table that the state is going to fall apart or that the fiat currencies are going to go away. You're simply saying, look, this has value. I see the institutional clients that I have. They want to trade this thing. And I believe that it's small today compared to the traditional FX market, but it's going to become much, much bigger over time. But with that said, what you're doing is, and I think it's incredibly intelligent of you, is you're saying, look, I'm going to treat this

just like I treat every other asset that we trade. So if we're going to hold dollars, if we're going to hold euros, if we're going to hold whatever on our balance sheet, we better damn make sure that we're holding Bitcoin as well. And it's not going to be 50% of our balance sheet, but it's going to be some percentage. Is that kind of a fair summary? A hundred percent. Put simply again, I can't be Michael Saylor. I can be somewhat more like Elon Musk, right? I wish there was a dollar behind both of them, by the way. I tend to agree with you. So let's talk a little bit in terms of what you're seeing from the actual institutions themselves. Why are they coming to trade this? Is it because they think they can make money?

Is it because they've got fear and they're running from kind of traditional markets? Is there some macro issue? Is it just you're an amazing salesman and now they want to go trade on LMAX digital? Like why are they coming to actually trade? Yeah, it's a bit of all of those apart from the amazing salesman bit i mean look all i do we do a very simple thing and all our exchanges we just match buyers and sellers right so um we like markets and move and we like to try and meet our customers needs so i think uh there's nothing wrong with making money so some people are in it because they see the gaps the potential as i said to you earlier price arbitrage the opportunity for them to make money in crypto um and right now you know everything is a bit a bit of a retail market

spreads are a bit wide commissions are a bit high custodial charges a bit high uh transition charge um transition of money or payments are a bit high there's a lot of compression has to come in so some of them are doing doing it for that reason the main players if you look at the banks the investment banks entering the space it's actually to facilitate customer demand right i mean there's a a well-known head of uh the biggest investment bank in the world said recently that they i'll put it in english right he said that the banks etc should be scared of witless he didn't quite use that term he should be scared of witless of fintech and blockchain because simply as i say Look at the big crypto names or big crypto platforms out there in retail land.

They've got 40 million customers. Those customers used to belong to the bank. So you've got to wake up. You've got to try and serve those customers. Otherwise, they're going to trade elsewhere. And guess what? When these new startups, relative new startups, been going less than a decade, have a war chest, right,

have a real balance sheet, what's to stop them moving into traditional markets? So that's a bit of fear. maybe, but also a lot of, hey, we've made a living all these years out of servicing our customers. If my customer calls up and said, you know, I want to buy a million dollars worth of gold, I have to be able to do that. Even though gold is really difficult to buy and move around the planet, right? It's really, really hard, but people like it. I'll go store it for me. And they also trust you to store it. And I send customers back and, hey, can you just get me, I want to diversify. Buy me 5% of my portfolio in Bitcoin. So they have to do it. So a mix of

the three, yes, a good opportunity to make money. Yes, some fear, but moreover, just serving the core customer base. So my understanding is you have no retail customers. This is all institutional spot trading and you're doing a very good job of doing it. Will you have plans in the future of serving retail or is the bread and butter in the institutional world and that's where you think you guys will stay that's our niche institutional segment is our is our niche it's what we're good at it's what we know i take my hat off to brian and guys like that they're very good at sales and marketing and onboarding and serving that segment of the market you know frankly if after this great interview you had a million applications it would probably take me about three years to get through

them, right? So the retail guys out there are brilliant at onboarding it, at doing the checking and servicing that customer. I don't see us making that leap ever. What I'd like to do is service that broker segment. So go back to my bread and butter, go back to my FX market. I have 200 retail brokers as customers of mine. What does that mean? Who cares, David? Why should anyone watching this care well i deliver institutional grade pricing to those 200 brokers those 200 brokers are much better than me at servicing their customer so they take my institutional price deliver it out there and they give you nice statements and nice charts and technical analysis and maybe some youtube videos like this right and they look after you

really well but what you have is and this is the beauty of modern capital markets is you have institutional market access so i'd like to service them more and some of the bigger names in crypto are already taking our our prices and taking our liquidity um and i think that just means we do what we're good at which is delivering exchange technology matching buyers and sellers you do you're good at which is sales and marketing and customer care and at the very back end right you're looking at the liquidity providers for example who do for a living they take risk for a living, they provide efficient pricing for a living. So I hope that ecosystem evolves within crypto. And certainly, that's why I see LMAX Digital playing a place in the next 10 years.

For sure. Right now, my understanding is most of this volume and client base is coming to you to trade on your exchange. Walk us through, are there APIs where other people can partner or take pricing, take volume, liquidity? How do you look at working with other people in the ecosystem? And how much of this is you want to be a kind of a platform play versus a destination for people to come and trade? You name it, we have it, right? So we're agnostic to how you want to trade. So again, I look at my core business. I think today I have 13, might be 14 as of yesterday, aggregators plugged in. That means someone likes to trade a futures view. Someone likes to trade a spot FX view.

Someone likes this technical analysis or these charts. Someone likes to use this algorithm to trade. I'm agnostic. So our API is standard. We have Java. We have .NET. We have FIX. We have itch.

However you want to consume the price data, you consume the price data. However you want to trade, I don't mind. Likewise, we contribute to a few indices out there. Just give our market data there. So out to those indices. So then hopefully we can drive derivative products. Now, what I what I hope there is that if you're trading derivatives of indices that are driven from my pricing, then when you want to hedge, you want to delta hedge, you'll come to LMAX Digital. But of course, my core bread and butter is matching buyers and sellers.

So I'd like when I'm agnostic and I send out all those links or all those on ramps, I hope that the end customer, some of that flow will make its way through to LMAX Digital. And that's traditionally what happens in any exchange infrastructure or ecosystem. For sure. Before I ask my last question, if you're watching this on the live stream right now, make sure you smash the like button and then leave your questions in the comments. I can see all the comments and I'll start asking questions here in about five minutes. So if you have questions for about LMAX Digital or anything else you've heard today, leave your comments there and we'll sort of get through those here in a minute. One of the questions that I want to talk about, though, and I think is probably not as well understood outside of maybe the core people who really pay attention to this every day is we are seeing a massive outflow of Bitcoin from exchanges, mostly in retail exchanges or very large exchanges. But this is people that are coming in, they're buying Bitcoin, and they're choosing to withdraw that Bitcoin into cold storage, into their wallet, wherever they're taking it.

And so there's a school of thought, again, nobody knows for sure what will happen in the future. But there is a school of thought that as that kind of supply on the exchanges goes down, more people are coming into the market, you almost get this like short squeeze phenomenon, right, where price has to go up significantly in order to, to accommodate that new demand with a decreasing supply on the exchanges. One is just what are you guys seeing? Can people withdraw Bitcoin from the exchange? If they can, are you seeing that happen? And then two is kind of just from a philosophical or structural standpoint, is that something that you guys pay attention to? Do you have concerns there or is that maybe a positive sign? Like, how do you just think about that? Okay. A lot of questions in there, Anthony, but I'd say, yes, it's happening, right? Because a lot of people, you know, you're one of the ones, hodlers, right? All the hodlers.

That's not great for a pure old exchange guy, right? I only, you know, we only do well. oh, I only get to pay the bills, I only get to pay for the light switches when people buy or sell. But yeah, at the moment, it's an investment asset, right? Dare I say it,

Bitcoin itself is now a store of value. Wow, that means you might buy it and hold it. So I think it's okay. I mean, the coin doesn't have to live on exchange. It shouldn't live on exchange, right? If you really are an investor, buy it, store it however you see fit. Now, that might be in our digital custody.

Yes, everyone. we we have a custodian solution but we we didn't set out to be that store it with one of the other custodians around that store it yourself it's not that difficult if you're in the crypto space i think you'll work out very quickly how to keep your private keys safe so yeah that's certainly that's certainly happening i think what we need as part of the market is we need in traditional parlance we need an efficient repo market it's not efficient today it's very very expensive now what's going to happen real quick before you go on explain kind of what that means we talk about the repo market and for the some people may not understand how that works in

the traditional world yeah look i think that happens i think it happens a lot the easy way to look at it is probably gold right you own gold right you hold it in a vault and then someone says hey do you want to earn some interest on that gold because actually this piece of metal sitting in a vault doesn't earn you anything right but i can actually make it work for you because someone else is going to view on gold, they're going to sell it. But they need to cover that short position. So we're going to lend them that gold so they can deliver it. And you're going to work. They're going to pay some interest for that. And that's what's happening with Bitcoin today. And certainly even more sometimes with Ethereum. There is a shortfall. It's back to the arbitrage of moving

coin around the system or dollars around the system. So we need maybe a simpler way of looking going to stop borrowing and lending. It's okay to take a view. Go short Tesla if you want. I wouldn't if I were you, but go short if you want. But then someone has to put that up. So if you go short, someone's going to say, hold on, who's delivering the Tesla to me? Hold on a minute. I'm going to borrow it for you. So you go over here, you borrow it, you lend it out. And the lender says, okay, it's going to be X percent per annum to borrow that. At the moment, the rates in some coins and in bitcoin at times are written you know high double digits i mean that's it's that's scary now why is that repo market or that borrowing market not efficient right now because

who you're lending it to where's it going where's the transit are we sure the channels are in place so that you know he's going to give it back to you so in the grown-up stock market for example someone's lent you tesla thank you very much but it's probably a bank right or a regulated broker and they're giving it to another regulator then they're pretty sure they're going to get it back so the repo market at the moment is you're not quite sure who's getting it who you're giving it to so we need some grown-up credit infrastructure to facilitate that repo market and then overall again the market will be efficient so not every asset held in a vault is valueless or earns nothing right we can put it to work i think this is a very exciting part of the market it will make

it much more efficient going forward. All right. We've got a ton of questions from people. I'm going to fire them off. We're going to start with a fun one first. Do you support England or Ireland rugby? Ireland, 100%, not open to question. In fact, I support ABE, anyone but England. You already know that the trolls, you're trolling the comments, which is good. We're off to a good start here. All right. So one question comes from Lord of House Stewart, which is a fantastic name. Is David looking to expand LMAX to move toward being a crypto prime broker, custody, lending, borrowing, et cetera? How do you think about where you guys are today and expanding the offering? Or will you just stick with more of the exchange infrastructure?

I think we kind of do that. That's part of the, I mean, the crypto ecosystem is so nascent. I don't have a prime broker out there, so I have to prime for customers. I prime for my brokers already. So if you like, I have a bunch of institutional liquidity providers. They wouldn't onboard necessarily or face my customers on the other side. So LMAX Digital is basically the principle on a lot of those trades. So I effectively clear already for brokerage customers or smaller funds that wouldn't be known. So in the banking environment or more established capital markets, you go to name a bank, ABC Bank, XYZ Bank, you deposit your funds there.

They prime you onto LMAX exchange. That plumbing isn't available today in crypto. So I do it. Do I think down the line there's space for better primes? People who do purely that as a living? Yes, 100 percent they do that. another question they asked there was uh do i provide custody yes do i think custody is a big business going forward for someone like us no right it's very low margin business and funny enough it's linked into that reaper market i talked about but there's no i can't just open a bank account like i can in my lovely fiat business i just go hey send me your dollars anthony yeah and i'll stick it in with bank of america jp morgan goldman sachs other banks are

available, right? They take care of all that for me. It doesn't happen with Bitcoin. I have to store it. So yeah, we have to have a very secure storage solution. We have to understand cold wallets and vault wallets. So we do it today. In 10 years time, I'd love it if there was bigger names in the market doing that and on-ramping, providing that on-ramp for customers to trade on LMAX exchange. Yeah, it makes sense. And it's one of those things where you just do it out of necessity, but I agree with you. Commoditized business over a long period of time. Next question comes from Tom Sen, who says, do you think that the next market downturn will not be as drastic because cold storage is becoming more popular and it discourages panic selling because

of the difficulty? And the context here obviously is in the past, there's been multiple boom and bust cycles in Bitcoin. And if all of a sudden now you have different types of investors or holders in the institutions, and then also as more and more Bitcoin moves off exchanges, how do you think that changes a potential drawdown. Yeah. So I don't think it's purely down to cold storage. It may have very little to do with that. Yes, it's double negative. I don't think the next downturn will be as drastic, dramatic. Incidentally, I think this is important to all the evangelists out there. You can probably tell me more accurately on the chart. 16th of March, 2020, right? Bitcoin was in free fall, literally like that. It looked like it was going to zero.

I'll give you another chart. Oil looked like it was going to zero. Now, here's what happened. All traded below zero, right? They paid you to buy oil. Somehow or other, I'm looking at the chart thinking, wow, look at this Bitcoin thing. It hovered just above the mining rate, funny enough. Call it 3,800, something like that. That was, for me, the second coming, the real birth, if you like, of Bitcoin, because then it's just gone steadily up since then. It showed resilience, resilience of an asset class, right? You kidding me? It was better to hold Bitcoin than oil right there and then? Wow. This showed that this was an asset class that was going to be here for the long term. So look, you've been around it long enough. We're going to see cycles. There's

still this, we're going to have market panics. Normally started in the stock market. Like it or not, Bitcoin is slightly correlated now. So when there's a sell-off, you're going to see the sell-off in Bitcoin. Could you see a 30% drop from here? Absolutely. Will it trade in the 40,000s again? Probably. Could it trade in the 30,000s again? Maybe. Does it matter? No, not if you're a long term investor i've already told you what my price predictions are so and i think again back to the institutionalization of the space there will always be a bid right when the institutions start to play oil couldn't find a bid it was actually more about delivery and fulfillment there was no bid for oil it looked like there was no bid for bitcoin but there was a bid because the miners worked out

hey i can still buy it here and make money right i can still produce and make money so So when the institutions come in, there will be bids. So you'll be getting people buying it all the way. Right now, when you see a gap, they'll be buying it all the way down, so to speak. So I think that's better. But certainly, Bitcoin and crypto will not be immune to market sell-offs in the future. Yeah. There's somebody who's got a question about age and demographics.

It's interesting because for the retail platforms, they think a lot about who is their customer? what does that age and demographic look like? It tends to skew younger compared to older and just all the things you know about technology companies in general, especially consumer facing ones. For you, do you see any sort of age or demographic differences between the decision makers, between the institutions that you're working with, or any sort of, maybe I'll call like personas that you guys have identified where you're seeing much more adoption or excitement than in other groups yeah probably not asian demographic so much um okay for everyone i guess i'm the old guy uh most of my most of my company is younger right so the head of my lmax digital

operation is younger than me by about two decades um your issues are good experience it's not age it's experience there we go there we go um i think uh what i'm seeing is the institutions that are coming in are they like risk they like trading and absolutely you couldn't put age down so one of the biggest trading groups in bitcoin today in the market not just an omx digital have been trading for decades traditional capital markets right they love the markets they love new markets they like making markets they like providing liquidity and they're agile you need to get back to that phrase again of an hft or a prop trading desk prop trading firms um they've been around for a long long time but they're adapting all the time to low latency they're adapting all the time

to to new products so that's what you're seeing and before we all go and decry the banks and say oh they're slow look they're just massive hulking organizations that have lots and lots of approvals, both internal and external, to fulfill before they trade it. Talking about age, demographic, or even experience, there's a lot of younger guys who love crypto, who love Bitcoin, working in banks today. Just their desk doesn't quite trade it yet. But they will. And you know, when they come, they're going to be big. And when they come, they're going to be good. That is both facts right there for sure. There's some questions about governments and how you think about should governments hold Bitcoin?

Should they be a little bit more adversarial against it? How do you think that'll play out? Should answer? Yes, they should hold it. I mean, look, what's the UK government doing? What's the US government doing if some of their some of their reserves are held in Bitcoin? Funny, I had a different question the other day and more about the FX markets. And we talked about Bitcoin becoming a reserve currency. Well, there's $12 trillion today held as currency reserves the world over.

60% of it is in dollars, 20% of it in euros. After that, the next biggest is the pound at 5%. Remember your one at about 5%. I didn't see Bitcoin anywhere. What are they thinking? What are they thinking with my pension? What are they thinking with my taxes, right? They need to do it.

And remember, the evolution of the market, I sense the impatience of yourself and the crypto evangelists out there. But remember, this monetary system, the U.S. dollar itself is only really 50 years old. Did you know the pound was the world's reserve currency before that? In between times, you had Bretton Woods and the gold standard. so yeah i mean look i think if countries aren't looking at it right now then there's something amiss and there's some appointments you've seen it in the u.s you've seen it in the fed um i hope in the uk there are they're hiring some younger people with a different outlook with some experience of crypto so yes they should hold it i hope they do and i'm certain by the way

they will do going forward in terms of will they outlaw it you know what let's make it big enough so they can't you can't now anyway right what are you gonna do make us all criminals no right what they will do is build a regulatory framework and i am there's one thing i you know i would i would nod to in terms of that we need to protect private investors we always should that doesn't mean ban them. It just means protect them, advise them, recommend them, make sure they understand the risks, right? So you're not going to find me ever offering 101 leverage to a private investor on Bitcoin, right? And that is irresponsible. So yeah, look, allow some of the regulators to come in, allow some framework. But I believe the great and the good across the globe will let this

industry breathe, we'll let this asset breathe. And that, again, will be beneficial for everyone. Completely agree on that. We're getting some questions about borrowing Bitcoin. When that becomes cheaper, will that drastically increase the shorting of the asset? Yeah. So what? It'd be great, right? You'd end up in an efficient market. Wouldn't it be good? Shorting it? Naked selling? Is that so bad? Or what about you just hedging? It'd be great. Can't we all just have it in our portfolio i'd love to have it in my pension just have it in my pension so that that means i'm long for decades i hope but then hedge it day to day right someone takes a naked short position okay we've all seen the big short okay let's find out what the bottom is

so that um lower cost of credit means you have an efficient market right and that means you haven't just at the moment you can be two you can be i guess you can be three things in in bitcoin or crypto you can be wrong okay so let's forget those guys right um you can be you could have you can be have no position right or you can just sit and hold on for dear life no no no let's have an efficient market where i can take short-term views where i can sell right and this is how markets evolve. Wouldn't it be great? Imagine the old open cry trading floors. Wouldn't they be farming Bitcoin, right? Imagine trading places on Bitcoin. Forget frozen orange juice. Someone should make that film, right? Except on Bitcoin. So imagine that. Some dummy over there is going

to be shorting it forever. Good. You'll be on the bid. Someone else will be on the bid. So yeah, I think an efficient market, an efficient repo market or lending market will make for greater efficiency overall. So I want to end with two last questions. One just came in that's pretty good. This says, given the recent big boys interest in crypto, mainly Bitcoin as an investment, what do you think about the other newer aspects of crypto, DeFi, NFTs, and everything outside of Bitcoin? Great. So NFTs, I know virtually zero about. So let's park that. I'll leave it to someone who knows you can tell them later um defy i love it okay i love the theory of it absolutely my idea of trading everything against everything tokenizing the world i love it

it's hard to participate in it right now i think it will change capital markets right i take my hat off to everyone that's investing time in it i hope they do fabulously well i think in defy 2021 is the 2013 of bitcoin so don't worry you're not too late if like me right you didn't have an account with a uniswap and you weren't exchanging tokens until a few months ago you went too late a bit like you went too late to bitcoin in 2013 so i think it's got a long way to go um i think we can help lmax digital lmax group can help i think you're going to need oracles sources of price discovery you need to know the value of assets when you're exchanging those swapping them smart contracts need to know how to value it right you need to really make sure

it's riskless but yeah let it fly let it fly i think defy could well be the third industrial revolution of our times we had to wait hundreds of years for this for the second one right it really could be phenomenal and i hope we could participate in terms of being an on-ramp whether that be through fiat through through bitcoin it's ethereum obviously ethereum is the main one at the moment um and maybe as maybe as a pricing source going forward but yeah um wonderful progress in capital markets, in my opinion. Let it fly. I love it. I end every interview with the same questions, but I'm just going to cut it down to one so I can get you out of here on time. Aliens, are you a believer or a non-believer?

I think they run the world, Pomp. That might be the best answer I've ever got. What do you mean by that? Let's just leave it there, shall we? They literally run the world. Maybe they run the world, right? I love it. I love it. Where can I send people to find out more about LMAX Digital or find you on the internet? Very simple.

LMAXdigital.com or LMAX.com. I'm David Mercer. You'll see me everywhere. Just reach out. And I look forward to us all benefiting from this great growth we're all going to experience in crypto. LMAX Digital. Let it fly.

Let it fly. David, listen, thank you so much for the time. I think people are really going to enjoy this while I do it again in the future. Thank you very much. Cheers, Anthony.