Wall Street, Crypto Giants Line Up to Back Startup Prime Broker

Some of the world’s biggest trading houses and cryptocurrency firms are backing a small startup that aims to ease Wall Street’s entry into crypto trading by tackling counterparty risks and conflicts of interest. 

Hidden Road Partners, a prime brokerage focused on digital assets and foreign exchange, completed a $50 million funding round last month that included Citadel Securities, as well as the investment arms of cryptocurrency exchanges FTX Trading Ltd. and COINBASE Global Inc. Now it’s in discussions with hedge funds and many of the top 20 global banks about providing access to trade or hedge their crypto risks, executives at the firm said. 

The recent crypto meltdown has heightened the importance of managing counterparty risks, after influential crypto hedge fund Three Arrows Capital defaulted and crypto lenders and brokers such as Celsius Network Ltd.Voyager Digital Ltd. filed for bankruptcy protection. Such credit risks could hamper traditional funds’ interests in trading directly with cryptocurrency firms. 

“The recent episode with crypto lenders has made it abundantly clear that the industry is in need of better real-time credit risk management,” said Ramnik Arora, general partner at FTX’s venture arm. “Hidden Road is making it easier for risk-conscious borrowers to access credit markets, reducing systemic risk for the ecosystem.”

For banks or other institutions that can’t hold digital assets directly, the firm allows them to post dollars as collateral in a “tri-party” setup with a custodian, and receive profits and losses in dollars. Clients can trade with exchanges as well as liquidity providers including Virtu Financial Inc.Optiver BVWintermute Trading Ltd

The startup is entering a crowded space where an increasing number of crypto platforms and brokers are vying for institutional traders. But unlike many others, Hidden Road said its pure-play structure would eliminate potential conflict of interests, such as front-running a customer’s trade to make a profit through a proprietary-trading unit. 

“Hidden Road does not trade,” Justin Chow, the firm’s head of digital assets, said in an interview, adding that it doesn’t make markets, doesn’t do over-the-counter deals and doesn’t do any venture capital. “And we do not sell our clients data, so we do not provide liquidity as a principle using our own capital and balance sheet.” 

While Hidden Road provides clearing and financing for customers’ trading activities, “the client has to execute those trades themselves,” Chow said. “We are working with our client, not against them.”

Top Executives

Founded in 2018 by Marc Asch, formerly with Steven Cohen’s hedge fund SAC Capital and Point72 Asset Management, Hidden Road started with foreign-exchange services and expanded into digital assets in October. Laine Litman, who was head of FICC and co-head of crypto at Virtu Financial, joined as president this year. Hidden Road, based in the British Virgin Islands and named after the street in Massachusetts where Asch grew up, has more than 80 employees globally including in New York, London and Singapore. 

The firm takes on counterparty risks on behalf of the client and the crypto exchange or market maker. That means if a counterparty defaults, the startup would be on the hook for completing the defaulted side of the trade. In exchange, Hidden Road’s prime-brokerage fee incorporates this aspect of credit risk.

Unlike a traditional bank, Hidden Road doesn’t carry a large balance sheet to lend to its clients. Instead, it raises capital from investors such as pension funds and pays them a return on capital, which it generates by providing financing to clients for their trading activities. Hidden Road itself mitigates risks by using a real-time system, which sets risk limits and requires portions of collateral upfront.

Hidden Road said it plans to enter futures and options clearing. The goal is to allow clients, such as hedge funds and prop-trading firms, to lower borrowing costs for trading strategies by netting credit risk and positions across asset classes.

With the crypto downturn, institutional investors are “clearly relieved with the fact that the market has given them an opportunity to breathe and to play catch-up with their research,” Chow said.