The Other Side Of The Trade: OrBit Markets

This is the first post in a new series of interviews with market makers trading in the Ribbon Finance ecosystem. Today, we are starting with OrBit Markets - one of the main counterparties we trade with for Ribbon Earn.

Let's take a look at the other side of the trade!

Can you briefly introduce yourself?

Caroline, Zhiming and TJ co-founded OrBit Markets this year. Caroline is from France, and Zhiming and TJ are originally from China. We all met each other at Deutsche Bank, working together in the FX Derivatives trading team for several years. TJ left DB in 2014 to study computer science and work in the tech industry, while Caroline and Zhiming stayed on at DB until much more recently. We have now grown to a team of 8 people over the past few months, with 2 traders, 2 software engineers and one compliance and operations officer.

What made you want to enter the crypto space?

We noticed that none of the established crypto market makers were offering exotics and structured derivatives, and were so surprised that we thought we would do it ourselves. Those products are a big part of a derivatives trading desk in traditional finance, and it was also our specific expertise as sell-side traders in TradFi, so it was a very natural fit. We were of course also very excited to be able to build a company in a new industry, with an opportunity to have much quicker and bigger impact than in our traditional finance jobs.

We are trying to demystify market makers, can you tell us what is your business? What kind of trades do you focus on?

Like any market maker, we provide liquidity by standing ready to quote a buy price and a sell price at any time. We differentiate ourselves by focusing on a specific client segment which is institutions, and a niche product type which is exotic options. We are now the most technologically-advanced institutional market-maker in crypto options and other structured derivatives. We work with our counterparties to design customized products that meet their hedging or investment needs and provide liquidity on these products. We then use our proprietary quantitative models to manage our portfolio risk and hedge with more liquid products.

What type of clients are you working with?

We work with a broad range of crypto-native institutions, from CeFi platforms to DeFi protocols and crypto-focused hedge funds. We have started seeing interest from more traditional macro hedge funds as well.

What is it like to trade volatility in DeFi vs. TradFi for you?

The volatility is of course much higher than in major FX pairs like EURUSD, but there are many traditional asset classes that have similar scale of volatility. The crypto options market feels most similar to precious metals options, with high volatility and low depth but still fairly high transparency on centralized exchanges. As in commodities, it is also quite fragmented between OTC and listed markets, and can be influenced by large participants in the physical market such as miners. 

What is your view on the growth of DOVs and DeFi options as a whole?

DOVs such as Ribbon in particular, have been one of the pioneering applications for decentralized finance, and we expect this to continue. There are currently over 40 DOVs across different blockchains and it’s starting to feel crowded. While the latecomers try to replicate existing products, the leading DOVs will start building more advanced strategies to differentiate themselves. It’s exciting to see the launch of Ribbon Earn. I think it’s also a great strategy of Ribbon to go up the supply chain from the final product to its components which are a lending protocol and an options exchange. Ribbon is well positioned to succeed in these new initiatives.

The growth of DeFi options exchange has been slower so far, mainly due to low capital-efficiency when trading on-chain, as well as other more technical difficulties like on-chain order book management, margin management and security risks. We are not blockchain technical experts ourselves, but we are keen to work with the various DeFi teams who are looking to solve these problems and help provide liquidity to their protocols. We see the recent announcement of Aevo Exchange as a potential game-changer, and we are actively working with the Ribbon team on that project.

In which areas do you see the largest potential upside for DOVs?

We are very excited by the recent push by DOVs to diversify their product offering, with Ribbon once again taking the lead. Different users will always have different risk appetites, and it is necessary for DOVs to offer a wider suite of products to cater to multiple investors' risk profiles.

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?

The traditional markets are generally more efficient in matching buyers and sellers of volatility. The crypto options market is still very fragmented on multiple dimensions, such as CeFi vs DeFi, Asia vs Americas, regulated vs unregulated etc. This makes it difficult for the market to efficiently match trading interests, and eventually results in higher costs for investors. At OrBit, we are working to bridge this gap by partnering with a wide range of institutions.

Another dislocation that is unique to DeFi is the large discrepancy between the implied vol on centralized exchanges such as Deribit and the implied vol from the fees by providing liquidity to decentralized exchanges such as Uniswap. Currently there is no easy way to take advantage of such dislocation, but a few protocols are already tackling it, through enabling the borrowing or lending of LP positions. 

What are the main flows that you are observing in the crypto vol market?

Many participants seem to have recovered from the huge market shocks in the spring and summer, and are now back to business and looking to generate yield. At the same time, the comparatively easy trading opportunities such as cash-futures arbitrage and yield-farming have nearly evaporated. So as you would expect, we are now seeing a lot of interest in yield-generation products. Products tend to be fairly short-dated, around 1 month or shorter, and are usually linked to major tokens like Bitcoin and Ethereum, as investors look to be quite conservative with the risk they are taking.

What is your favorite trade in the space at moment?

We like cheap limited-loss ways to be long BTC at these levels. For example, a 30 days BTC 20,000 call with continuous knockout at 24,000 only costs 335 USD premium (using 19100 spot reference). By comparison, a 20,000 vanilla call would cost 955 USD, so the barrier provides a 65% cheapening. On this trade, the maximum loss is only the premium (335 USD), and the maximum profit is 4,000 USD, a potential 12x return. 

This interview is intended for educational purposes only and does not constitute the provision of investment advice and is not intended to do so. OrBit specifically disclaims all liability for any direct, indirect, consequential or other losses or damages that may arise from any reliance on this article.
Trading in cryptocurrencies, derivatives and structured products may involve a high degree of risk and may not be appropriate for all investors. Under some market conditions, it may be impossible to liquidate a position. Investors may suffer substantial losses and even lose the entire amount of your investment.
The product described in this article is intended for sophisticated investors capable of evaluating the merits and risks of the product, its suitability and appropriateness and its legal, taxation, accounting and financial implications and that in making this evaluation, investors are not relying on any recommendation or statement by OrBit. Investors should ensure that they independently assess these things and fully understand the product. They should also consider seeking advice from their own advisers in making this assessment.
Prices provided in this article are illustrative only and do not represent a firm bid or offer price.