ANALYSIS: One Trading aims to deliver perpetual futures to institutional market

Amsterdam-based One Trading, which secured in July approval for a regulated perpetual futures exchange, aims to deliver the attributes of leveraged “perps”, which have proved popular with retail traders, to the institutional investor market through a MIFID-approved venue. The

Josh Barraclough, the founder and chief executive of One Trading, said perps are similar to contracts-for-difference (CFD) in that they are simple, and clients don’t have to worry about the complexities of expiries and clearing, for example.

“That simplicity is appealing to retail clients, while institutions value perpetual futures for their capital efficiency, operational simplicity and arbitrage opportunities,” he said.

The crucial difference between CFDs and perps however is the futures are traded on a central limit order book “where 50% of people make money on a trade and 50% of people lose money on a trade”. There are also no hidden fees or lumpy margin calls.

Barraclough added: “So, you end up with a great product - but one that’s largely unregulated and exclusively offered offshore, where customer protections are minimal and risks are high (e.g. FTX). For us, it was a question of how do you take this amazing product and bring it onshore and create the ideal product and provide regulated markets customer protections?”

One Trading launched on Wednesday with Bitcoin/ Euro and Ethereum/ Euro cash-settled perpetual futures, making the firm the only Mifid II-regulated perpetual futures platform in Europe. The new venue also trades 24-7 which sets it apart from other institutional-grade crypto derivatives markets.

The new venue trades 24-7 and is not cleared through a central counterparty, which set it apart from the cryptocurrency futures at Chicago’s CME Group or Frankfurt’s Eurex.

Barraclough said his team made this decision because the established traditional finance models such as intermediated clearing are incompatible with new products like perps.

“The first problem we had was that you could not use the existing regulatory or technical infrastructure to implement perpetual futures. For example, traditional clearing infrastructure doesn’t work for perpetual futures. These instruments are constantly settling in real-time, making conventional clearing venues unsuitable to support the products.”

Unlike the established clearing houses, which call margin no more than a few times a day, One Trading settles open positions every 60 seconds so counterparty exposure is minimised.

The chief executive said: “So instead of once-a-day T+1 settlement risk via a clearing house, you have a T+1 minute risk. That not only reduces your counterparty risk but it also reduces your regulatory capital requirements as while the contract is perpetual in nature the one minute settlement means that it technically also only has one minute of expiration.”

Like some native crypto exchanges, One Trading deploys measures to manage client positions if the market moves against them.

“If an individual is trading and their margin drops below a certain level, we move them into what is called de-risk mode which means the individual would not be able to increase their position until they’ve either increased their margin or the market moves in their favour.”

He added: “If the market continues to move against them and they have not re-capitalised, at a certain point, we do a partial liquidation to bring the position back in line with what we think is an acceptable level from a risk perspective. If the market continues to go against the individual, we can ultimately do a full liquidation.”

In the unlikely event that One Trading is unable to liquidate a position, Barraclough said the firm can suspend trading, auto-deleverage (ADL) or even rip up trades. “The key difference is that our real-time tools give us many earlier opportunities to manage risk more effectively and we have an insurance fund in place to protect winning positions in an ADL scenario.”

Barraclough is also keen to stress that One Trading does not trade on its own book, something that FTX was famously doing before its spectacular demise in 2022.

“We provide matched principal trading and are not the economic counterparty to any trades on our platform. We are the contractual counterpart but we are not the economic counterpart, that means we don’t take any economic or counterparty risk in any of these trades, which means there is no default risk.”

Looking ahead, the One Trading chief executive is confident there is a strong use-case for perps beyond cryptocurrencies. “We are starting with Ethereum and Bitcoin before expanding into other major crypto assets."

Barraclough added: “We are also introducing cross-margining across eligible crypto and traditional securities such as equities and bonds. Beyond that, we are actively working on an equity perpetual futures product, covering both single stock and equity index perps, starting with US equities.”

A panel of experts this month said Europe’s clear position on cryptocurrency derivatives regulation is an advantage compared to the more complicated picture in the US.

Chicago’s CME Group has established itself as the regulated cryptocurrency derivatives venue of choice, trading 3.95 million lots of its main bitcoin futures contracts last year, according to FOW Data, which was up two fifths on 2023.

Eurex’s US dollar-denominated bitcoin future, which launched in March 2023, traded 30,800 lots last year, which was down 53% on the previous year, according to FOW Data.