Crypto Exchanges Clamping Down on Prime Brokers Is Backwards Step for Market Efficiency, Traders Say

First Binance and then OKX started to put pressure on major brokers that offered low commissions to their clients.

Some trading firms claim that this is a step towards less efficient markets and is a result of major exchanges seeking to increase their volume.

The world’s largest cryptocurrency exchanges are pressuring brokerages that bundle their clients to take advantage of lower trading fees, with some market participants warning the move could hurt markets.

Binance was the first to make changes to its Link Plus interface last month, preventing prime brokers from using its multi-tiered fee system to reduce their own costs and offer refunds to their clients. Now OKX appears to be doing the same, restricting access to its VIP fee program.

Exchanges say they are taking these steps to create a level playing field for their users and also to provide transparency into the identities of their prime broker clients. Others see it as a step backwards, at least from the perspective of creating more efficient markets.

Cryptocurrency markets are built primarily for retail customers, and are therefore very different from traditional financial markets. In mature markets, primary brokers offer institutions the equivalent of a simple bank account, behind which an army of brokers safely store cash and assets, facilitating lightning-fast transactions across a wide range of venues. Primary brokers also provide credit, allowing traders to mix and match positions, with everything cleared and settled a day or two later.

Crypto’s ability to eliminate the middleman and provide real-time settlement via the blockchain means that large participants making multiple simultaneous trades must pre-fund all of their positions across a large, vertically integrated group of exchanges. George Zarya, CEO of Bequant, a primary brokerage firm serving crypto clients, notes that primary brokers solve this funding problem through their lending and financing components.

By restricting brokers’ access to lower fees, exchanges may be, perhaps unintentionally, making the cryptocurrency market less attractive to them.

“The exchanges have decided that brokers are not necessary. They can provide credit, right?” Zarya said in an interview. “But they can only provide credit for positions based on their exchanges. They cannot provide portfolio margin that includes your positions across the entire market. So we are essentially moving towards less capital-efficient markets.”

Brendan Callan, CEO of Tradu, a recently launched crypto exchange owned by investment banking group Jeffries, said major crypto exchanges are moving toward “liquidity capture.” In other words, they are creating a captive audience model where trading volume increases because a user must constantly enter and exit positions on that exchange.

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The result, Callan said, is a discrepancy in bid prices from one exchange to another for very popular and liquid pairs like BTC/USDT. He said the discrepancies between exchanges would seem “crazy” to a traditional forex trader because all the liquidity providers are doing behind the scenes is switching to a primary brokerage account and creating markets on other exchanges.

“That means that you don’t have that friction between counterparty risk thresholds across all of these exchanges. But the crypto exchanges themselves insist on that because they want that takeover,” Callan said in an interview. “They want you to get in and out of positions on their exchanges because it increases their volume, but it comes at a cost to the quality of their liquidity. There’s not a lot of depth in the market behind each offering, and it’s very sparse.”