Trading Firm DRW Allows Crypto Investors to Hedge Risk With Bilateral Options

Trading Firm DRW Allows Crypto Investors to Hedge Risk With Bilateral Options

DRW Holdings LLC said it’s the first large trading firm to offer over-the-counter bilateral crypto options, paving the way for more institutional investors to deepen their participation in the cryptocurrency market. 

Cumberland, the Chicago-based firm’s crypto division, is now a liquidity provider for the so-called bespoke options, targeting major crypto holders like Bitcoin miners and investors that need to hedge risks or generate yields. The offering will allow traders to customize each trade’s expiry date, strike price and underlying coins. 

“We feel like that’s where the market is heading. We’re seeing the development and the interest building, so we are putting a ton of resources into making sure that we’re going to be the best provider of that product,” said Rob Strebel, DRW head of relationship management.

DRW, a proprietary trading firm founded by Don Wilson in 1992, is known for its derivatives trading in the traditional financial market. Its crypto unit -- which got it start in 2014 with mining -- has become one of the largest traders in cryptocurrencies. It is a leading liquidity provider for CME Group Inc.’s Bitcoin futures, and last year it executed Goldman Sachs Group Inc.’s first-ever block trade in crypto. 

The market for OTC bilateral crypto options, still in its infancy, has been dominated by crypto-native firms such as Genesis Global Trading Inc. and Galaxy Digital Holdings Ltd. But Cumberland will be among the first to enter the space with a traditional finance background, complete with a big balance sheet and established creditworthiness. While there’s no publicly available data on the market size of bilateral options, industry participants say it’s a meaningful and growing part of the overall crypto options market, where most volume is traded on exchanges such as Deribit and CME. 

Adding a liquidity provider like Cumberland is “just one more development for it to make it easy for institutions,” said Nate Conrad, global head of asset management at NYDIG, a Cumberland counterparty.

As crypto borrowing and lending faces more scrutiny from U.S. regulators, “the more traditional way of creating yields within the option market looks a lot more palpable to investors,” said Strebel. For instance, selling call options and collecting premiums can allow investors to still make a profit off their holdings when Bitcoin trades sideways.

Wall Street banks that have avoided crypto options thus far may also be interested in bespoke offerings once they become more comfortable with crypto, Strebel said. Last December, Andrei Kazantsev, Goldman’s global head of crypto trading, said in a panel discussion that there’s a lot of demand for more derivative-type hedging and the development of an options market will be the next big step for institutional adoption. 

The trend of more established players entering the crypto market has been ramping up in the past few years. DRW peers Jump Trading, Jane Street, and Hudson River Trading are active in crypto trading. And Ken Griffin, previously a crypto skeptic, has recently hinted at the possibility of Citadel Securities LLC becoming a market-maker in cryptocurrencies.

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