The Other Side Of The Trade: Galaxy
Can you briefly introduce yourself? What made you want to enter the crypto space?
Galaxy (TSX:GLXY) is a digital asset and blockchain-focused financial services company working with institutional clients across five business lines: Trading (which encompasses Galaxy’s digital asset spot trading, derivatives and lending desks), Asset Management, Investment Banking, Mining and Ventures. Founded in 2018 by Mike Novogratz, Galaxy was originally started to bridge the gap between the crypto and institutional investment worlds. Galaxy had 395 employees as of the end of Q3 across its headquarters in New York and offices in Chicago, New Jersey, Texas, London, Amsterdam, Hong Kong, Tokyo and Cayman Islands (reg. office).
Jason Urban is the Global Head of Trading at Galaxy. Previously, he was CEO of DrawBridge Lending, LLC, which was acquired by Galaxy in 2020. Before that, he ran the equity volatility trading businesses at DRW and Goldman Sachs.
We are trying to demystify market makers, can you tell us what is your business?
Galaxy’s mission is to help institutions participate in a digitally native economy. Outside of our Trading business (where we provide sell-side liquidity in digital assets), Galaxy also:
Manages active and passive strategies for investment (Asset Management)
Helps with full-lifecycle capital raise and advisory services (Investment Banking)
Participates in proprietary mining and bespoke miner financing solutions (Mining)
Directly invests in early-stage and late-stage venture and liquid digital assets (Ventures)
What type of clients are you working with? What kind of trades do you focus on?
The type of clients/counterparties we work with differs according to the relevant business line. Across the board, Galaxy has over 880 trading counterparties, ranging from large TradFi institutions (banks, asset managers, pensions) to corporates (miners, payment providers) to crypto natives (funds, protocols, exchanges). We cater our services to each specific segment.
Given our diverse client mix, our offering ranges from vanilla to sophisticated trade structures. Galaxy provides OTC and on-exchange liquidity for spot and derivatives across 100+ tokens. Our lending desk facilitates borrowing and lending of fiat, stablecoins and tokens. We also build customized client solutions, including hedging programs and bespoke lending/liquidity facilities.
What product or underlier do you usually trade with Ribbon and why?
Galaxy participates in bidding for options which Ribbon auctions off as part of their Theta Vault program. These vaults are an important source of systematic vol supply in both the majors and alts for our broader derivatives book. The stable/recurring nature of this inventory also helps the desk fill internal axes and facilitate external client flow.
What is your view on the growth of DOVs and DeFi options as a whole?
As the space becomes more institutionalized, there will likely be an increased demand for access to on-chain derivatives products for use in portfolio construction and risk management. We are passionate about ushering in a new economic paradigm. An important part of this initiative is broadening the product suite available within DeFi. Options are no exception. These powerful tools can help market participants express views and manage risk. We anticipate that the use of DOVs will continue to grow as they provide improved accessibility to options trading for a wider range of institutional users.
In which areas do you see the largest potential upside for DOVs?
This is largely about Treasury Management – giving Founders, Foundations, DAOs more options (no pun intended) in transforming their balance sheets through custom strategies. Additionally, DOVs can help achieve the goal of decentralization by allowing traders to trade options on-chain without relying on a central authority to manage the underlying assets or settle contracts. This can provide greater security, transparency, and efficiency regarding options trading and settlement flows.
What is it like to trade volatility in DeFi vs. TradFi for you?
The market microstructure in crypto vol is very different from what’s observed in traditional markets such as FX or Equities. Crypto leads in terms of transparency and electronification of the market but suffers from fragmented liquidity as trading is dispersed across venues. Further, the OTC interdealer market (a major source of liquidity for TradFi asset classes), is still in its infancy in Crypto.
Back in March of this year, you traded crypto options OTC with Goldman Sachs (article). Do you see more flows coming from TradFi or DeFi counterparties and what are some of the differences when trading with each?
Although we’ve seen increased institutional interest in the space, TradFi is still very early in terms of directly trading crypto compared to other ways of getting exposure like investing in blockchain companies or crypto funds. In terms of direct trading, cash-settled derivatives have been a particularly attractive instrument to start with for folks who are not ready to trade spot or deal with the custody challenges of digital assets. Whereas crypto-native participants are increasingly looking across the market cap spectrum for idiosyncratic altcoin exposure, larger TradFi institutions looking to trade directly tend to start with BTC/ETH.
What are the main flows that you are observing in crypto vol market?
In the wake of the events of the last few months, we have seen increased interest from non-traditional option users coming into the space. Hedge funds (both traditional and crypto-native funds) are increasingly looking to use options rather than spot to express opportunistic views on the market. Although the focus remains on BTC and ETH, we’ve also seen growing interest around short-dated altcoin vol from crypto-native players.
Can you tell us about a structural dislocation you are seeing in the crypto volatility space that is not necessarily present in traditional FX or Equity vol?
Crypto has unique dynamics and opportunities. Crypto vol markets are generally less efficient, lacking the large structural flows from natural institutional vol buyers/sellers present in Equity and FX vol markets. Further, the inefficiency in price discovery for options is exacerbated by the lack of consensus on a standard volatility modeling technique. As such, crypto often presents opportunities to profit from monetizing these vol dislocations. Crypto implied volatility typically trades at a higher spread to realized compared to what is seen in TradFi, which is justified given low liquidity in the tails.
Where can we get more information on Galaxy?
For more information, please visit our website and our investor relations page. More information on Galaxy’s leadership can also be found here.