Exchange for Bitcoin-related derivatives Bitnomial is launching block trading for the first time in an industry bid to capitalize on a long-standing traditional finance practice, as institutional interest in bitcoin and ether options has increased significantly in the United States.
As digital asset markets collapsed in the fourth quarter of 2022, open interest in the United States and other countries plummeted. However, open interest, a metric that reflects the number of outstanding contracts on a given unsettled options contract, has recovered in the first quarter of this year.
Bitcoin (BTC) was down about 7% in the previous seven days as of Thursday’s stock market close in New York. “Recovered” is an understatement when it comes to bitcoin options on Deribit; they hit an all-time high last month, as previously reported by Blockworks. According to the company, volume on Deribit, which has long been one of the world’s largest bitcoin and cryptocurrency option exchanges, exceeded $20 billion at the time.
Regulators in the United States have limited digital asset options to bitcoin and ether (ETH). Bitnomial President Michael Dunn told Blockworks in an exclusive interview on Thursday that the exchange is launching block trading this week because “now’s a good time as we see a lot of crypto-native firms coming in” to the bitcoin options trading space with “dry powder to splurge.”
And, according to Dunn, they’ve specifically requested customized baskets of Bitcoin option books. Crypto hedge fund managers, family offices, and other types of traders typically shop around for market makers on digital asset options, often contacting multiple counterparties to try to lock in the best possible price with the best possible execution.
Block trading is an over-the-counter (OTC) arrangement in which a market maker and a buy-side counterparty agree to take on a certain number of derivatives at a certain cost of carry.
It takes longer than executing an algorithmic trade on BTC options linked to underlying bitcoins. However, traders find the practice worthwhile if they buy in bulk and buy futures contracts at a discount to where the market prices the cost of opening and closing them.
“They came knocking on our door saying, ‘Hey, you guys have a lit order book and electronic execution, that’s great.'” But we want to do more complex, structured trades that make sense atomically and in larger sizes, as well as poke around and do block deals.” Additional excerpts from Blockworks’ interview with Dunn, who previously worked in the Chicago options trading scene and has experience with quantitative market making of options on traditional option classes, are provided below.