Matthew Tweed is a world away from the Wall Street dealers. The 20-year-old just finished high school two years ago, never went to college and turned his room in his parents’ home in Surrey, England, into an office.
Thanks to the fragmented new world of cryptocurrencies, Tweed, with its one-man operation connected to two of the largest exchanges, is a market maker for Bitcoin derivatives like hedge fund professionals are.
After learning how to build low-latency market-making systems from a stranger on Reddit, he’s now trying to get rich with digital currencies before institutional players flock to the industry.
The hurdles in the stock market are high
“I really enjoyed doing it independently – not having to spend half a decade as a young analyst working 100-hour weeks at a bank,” he says over lunch in a café near his home before his working day begins . “I can do this for myself, and on my own terms.”
On highly regulated and liquid markets such as the stock market, where the financially strong professionals use high-frequency technology to drive up the entry barriers for little people, his ambition would have virtually no chance.
Tweed, who formed his one-man band as Pine Financial, tries to make money from the spread between the bid and ask prices for Bitcoin Perpetual Futures – a special crypto derivative for speculative betting – whenever it seems profitable.
Data and access free of charge
Thanks to a reliable set of trading opportunities that increase profits over time, annual profits of 100 percent can be expected, says Tweed. He doesn’t want to give exact numbers. A senior executive at an exchange he is active on stated that Tweed is a capable, responsive market maker.
In the industry where hundreds of billions of dollars change hands every day, tweed is a small player. Chicago trading firms like Jump Trading and Tower Research plunged into the industry a few years ago, and offshoots from companies like Goldman Sachs, Susquehanna International Group and Jane Street are increasingly entering the segment.
In crypto trading, data and access are free, which puts Tweed within the reach of amateurs. However, it is not yet based on high-frequency technology, which forces bank towers to be geographically close to data centers. The sector is based on decentralization and the number of trading centers is enormous. Coinmarketcap.com lists more than 300 exchanges.
“Everything in this area is just structured differently,” says David Fauchier, who lends capital to quant managers for Nickel Digital’s Factors Fund. “Completely different skills are required.”
Understanding of the market required
Modeling and programming skills are important, but a lot depends on a good understanding of the many peculiarities of the crypto market. For example, in traditional markets, high frequency companies place their servers near the exchange to maximize speed, known as co-location.
With cryptocurrencies, most platforms operate in the cloud, so Tweed performed a series of trades to find out the location of a particular exchange’s servers – a common strategy used by low-latency traders.
Given the high volumes involved in a wide variety of digital coins, derivatives, and exchanges, market making is a profitable crypto strategy in the bull market. Also, according to a report by PricewaterhouseCoopers and Elwood Asset Management, this has been one way quant long short funds have made returns.
Anyone can be a market maker
Aside from the bid-ask spread, some exchanges also pay huge discounts to liquidity providers, while some token issuers pay traders to trade their assets.
Not to mention decentralized finance, where virtually anyone can be a market maker by putting their coins into a liquidity pool, which then automates the buying and selling using a mathematical formula.
Tweed, in a crimson hoodie, sips his can of lemonade and says that now is the perfect time for early crypto converts to jump in with the myriad of possibilities.
“You don’t necessarily know whether cryptocurrencies will be the same in a decade,” says Tweed. “So you’d better use it now, as long as you have an advantage.”