Athena Bitcoin Co-Founder Says Why Token Issuers Must Stop Paying For Market Making


Athena Bitcoin Co-Founder Says Why Token Issuers Must Stop Paying For Market Making

In a recent article released by CoinDesk, Eric Gravengard, the co-founder of Athena Bitcoin and other crypto businesses, wrote about the role of market makers and the rules related to them in the United States.

He started the article by explaining that the goal of exchanges is to create an orderly market for digital assets. That means that there should be a balance between buyers and sellers that deal in the market. Market makers are obligated to provide a quotation at all times when the market is open. However, it is possible for a market to be functional and orderly but there are no guarantees that customers will be able to trade a reasonable amount for a reasonable price.

In the article, Gravengard talks about the obligations related to market makers. Each of the exchanges in the market has different rules related to the participants operating in it. For example, he takes the CBOE Rule 8.7 in which there are several obligations for participants.

“To prie options contracts fairly by, among other things, bidding and/or offering accordance with the bid/ask differential requirements determined by the Exchange on a class by class basis. […] A Market Maker will be required to maintain continuous electronic quotes […] in 60% of the […] options series of the Market-Maker’s appointed classes…”

Some companies that are working with Gravengard have been approached by token issuers, token technology providers and token exchanges. These projects wanted the firms to make markets for tokens.

Nevertheless, there are several reasons why it might be difficult to create an orderly marketplace. The exchange should compensate the firm that acts as a market maker in some way. This can be done with Security Tokens or tokens sold through an Initial Coin Offering (ICO). Gravengard explained that they have never accepted these offers.

According to him, there is a conflict of interest to be paid by the issuer of a security or other asset. It is difficult to be responsible for making a fair quotation that respects a true balance between supply and demand. Thus, they would be involved in an ethical dilemma: should they provide a quotation to make a profit or just providing a fair value?

The second reason that Gravengard gives regarding why they did not accept to be market makers is due to the fact that payment for market making is explicitly against the rules related to the securities industry. The Financial Industry Regulatory Authority (FINRA) prohibits this in Rule 5250.

Thus, there are very clear rules related to broker-dealers, associates and affiliates of broker-dealers dealing with securities or market making activities. This is why he believes that the whole market should follow these rules as well.

There have been several Initial Coin Offerings and projects that paid for market making in the past, especially during the 2017 bull market, which included the beginning of 2018. This is something that must stop.

If the cryptocurrency market wants to grow and become more mature, the best would be to adopt some of the best practices of traditional public securities exchanges. This includes basic rules of ethics, fair dealing, and orderly markets.

Regulatory agencies are increasing their scrutiny in the virtual currency market. The intention is to control it and improve the way in which it works. This would allow individuals and participants to operate in a market with clear rules and reducing the number of scams and illicit activities in the space.

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