Dmitri Galinov, founder and CEO of 24 Exchange, joins FinanceFeeds Editor in Chief Nikolai Isayev at the TradeTech FX USA taking place at the Eden Roc Resort in Miami to discuss the prospects for 2022.
Around-the-clock trading, including on weekends and holidays, may be closer than many think, says Mr. Galinov. The three-year-old startup has filed an application with the U.S. Securities and Exchange Commission to open a stock exchange that would be open 24 hours a day, seven days a week.
24 Exchange founder explains that his newest venture went live in 2019 with its first product, the FX non-deliverable forwards (NDFs). The multi-asset venue aims to offer institutional market participants a more cost-effective way to trade different asset classes through eliminating unnecessary fees.
While the Bermuda-based electronic platform initially traded NDFs, other FX derivatives, including swaps and underlying currencies, were planned to follow suit, as well as expansion into cryptocurrency and equities.
The company recently launched 24 Exchange Broker regulated by the Bermuda Monetary Authority to serve as a central counterparty for spot crypto trading. 24 Exchange broker was created to solve the problem exchange members have with rising costs of onboarding, clearing, and margin of spot crypto clients. Banks, hedge funds, and other market participants should be able to access the market at prices considerably below current rates, Galinov thinks.
Ballooning costs have also been driven by stringent KYC requirements and other compliance factors. To cut the costs, Galinov proposes to use the existing infrastructure of members who are already using similar facilities, regardless of the asset class they are trading.
“The reason we did this is that we looked at the onboarding process of our clients, who are mostly large banks and institutions. We found out that customer agreement, KYC, legal, and compliance are taking the longest time and effort. If you are an exchange, what happens without a central counterparty is that you have to legally paper per client versus every client. So imagine if you have 20 on one side, me on the other side, you have to set up 400 paperwork together for these people to interact, which takes an extremely long time at enormous cost,” says the founder and CEO.
Another benefit of a central counterparty is that it gives users a high degree of anonymity. Investors, according to Galinov, have always sought ways to trade anonymously and execute orders away from the public eye with minimal market impact.
24 Exchange has an arrangement in place with Standard Chartered Bank to offer a central prime broker clearing model. Traditionally, FX prime brokers created a capital inflow through charging initial margins from their clients whilst they don’t post such margins to their execution brokers.
Galinov stressed that their NDF launch was the start of a longer and much needed progression of the existing market structure. The rising costs of regulations and fees associated with the legacy exchanges have been the largest cost factor in many participants’ budgets – and with little to no utility in return.
“It was interesting to figure out that the financial firms are typically divided into two departments: FICC-(Fixed income, Currencies and Commodities) and Equities. But if you look at it, it’s all the same. It’s all electronic. It’s an FIX protocol, it’s a computer. So people that manage all these processes are doing the same job for two different departments. What is going to happen is that those two departments are going to be combined. As a result, market participants will realize most of our savings by not having to run two separate systems.”
“Another benefit is that it is difficult with crypto to find electronic trading professionals. There is also a shortage in FinTech professionals, so by combining that, the banks will solve the labor shortage problem.”
The industry veteran believes this will become more apparent when they switch to 24/7 trading, as the associated platforms need more people to supervise the business.
“We got the opportunity to start from scratch. Big exchanges like the New York Stock Exchange have been there for 100 years, they have all these different legacy systems, so it’s much more difficult for them to do it. We’re lucky enough that we started with doing it from scratch. So let’s just do it.”
Prospects for 24-hour trading proposal
Subject to the U.S. regulators’ approval, an affiliate of 24 Exchange would enable trades in equities on a 24-hour basis and with lower trading fees. The three-year startup is also seeking SEC approval to allow fractional trading in increments of as little as one-thousandth of a share.
24 Exchange has completed the final National Stock Exchange application. It now expects the SEC to release the filing and seek public comment on it.
The move comes as the founder is betting that deep-pocketed investors are demanding greater access to U.S. stocks, and also want to trade both stocks and currencies over the weekend. Many banks and large hedge funds are telling 24 Exchange they are excited about its pitch, Galinov said.
There is no guarantee that the SEC will approve the 24 Exchanges plan, but the founder and CEO believes the prospects are pretty bright for them to get it approved in 2022.
“We took a little bit different approach from previous exchanges, which initially filed the final form, and then solicited the SEC for back and forth. In contrast, we first filed the draft form with the SEC, then we had many calls with the regulator to get its feedback on that draft upfront. I think that was a very good approach, because this is something that nobody did before.”
Galinov describes their back and forth with regulators as “very productive” and only concentrated on small details.
“For example, we would need to have SEC staff over the weekend or holidays. After receiving this feedback, we submitted the final form on February 2. We expect the SEC to post the final form soon, and then they’ll solicit feedback from the industry and then make the final decision, but the good thing is that we already had a lot of discussions upfront versus other exchanges.”
The Bermuda government has recently awarded a new affiliate of 24 Exchange a formal license under their Digital Assets Business Act of 2018 (DABA). Dubbed ‘24 Exchange Broker Limited,’ the license issued by the Bermuda Monetary Authority allows the fintech firm to begin operating as a digital asset service vendor. The offshoot received a “Class T” Digital Asset Business Act license on February 8 and started operating a central dealer function for the crypto market.
Expanding a little bit further on the regulatory front, we asked why 24 Exchange selected Bermuda as a base to their operations.
Mr. Galinov thinks this BMA license enables them to bring spot cryptocurrency trading onto their institutional-grade platform, making it more safe, accessible and standardized. He also appreciates the efficient work of the Bermuda regulators as well as their dedication to supporting the growth of the digital asset sector in the British overseas territory.
“When we created the company in 2018, we looked at various jurisdictions. And you know, our clients are very, very big banks and hedge funds, so they have to work in a regulated environment. They can’t trade with an exchange that’s being hacked or facing other problems. They need to participate in an exchange that was vetted by a solid regulator. Bermuda became an awesome jurisdiction for that because they did pass legislation in 2018 obviously designed to attract cryptocurrency entrepreneurs.”
Fresh capital injection on the horizon?
24 Exchange had recently completed a fresh fundraising round of $14.25 million at an undisclosed valuation. The recent capital injection was led by Point72 Ventures, the venture capital firm of the hedge fund titan Steven Cohen.
Equally notable is that several global banks and hedge funds are now backing the firm, including Standard Chartered, which made a strategic investment in 24 Exchange in 2020.
In our interview, Mr. Galinov said he expects to receive new investment in 2022, including from some of the big-ticket names in the crypto space.
He explains that as his company goes through different stages, it has different challenges and needs. Raising capital will remain a constant challenge, he notes, and from round to round, they will meet different players, mindsets and requirements.
“We are currently completing another funding round of over $7 million. We are still in a seedling stage, meaning that while the core infrastructure is in place, we still need to add crypto trading revenue to make us profitable ahead of future growth funding rounds.”
Before being able to properly raise seed funding, 24 Exchange built a well-developed viable product, a strong core team, early traction and customer experiences showcasing the opportunity for their business.
Galinov believes it is never too early to establish a relationship with investors by having casual conversations on the business, the market opportunity, and what they are looking for in investments.
However, he said there are certain goals they have to reach first in terms of the number of clients onboarded, profitability, etc., before they go back to investors and ask for additional funding, which will be, obviously, at a higher valuation.
Concerning round sizes, Galinov says it would differ significantly depending on market conditions at the given time, but he expects to have future rounds that range from $50 to $100 million and possibly even beyond.
Mr. Galinov concludes that he looks forward to putting this additional capital toward further expanding their offering beyond FX NDFs trading, FX Swaps, FX Spot, and their most recent addition, cryptocurrency trading and equities.