#529: David Mercer on Institutional Trading Trends

David Mercer is the founder and CEO of LMAX Group, which owns LMAX Digital, the leading trading platform for institutional investors. In this conversation, we discuss why institutions want to trade cryptocurrencies, how important latency and infrastructure is, how LMAX Digital is servicing customers, and what trends David is seeing on a day-to-day basis. *This conversation audio is from a YouTube Live Q&A* ======================= OKCoin.com is the leading crypto exchange for both beginners and experienced users. You can fund your account in under 2 minutes, and get access to the most advanced trading engine, all while paying the lowest trading fees in the industry (0.1%). Visit www.okcoin.com/pomp and open your account today. ======================= Exodus is an absolute game changer in the crypto wallet space, and we’ve teamed up to offer an exclusive discount for you, as listeners of the podcast. Sign up for Exodus today using my promo code Exodus.com/pomp. This is a no brainer for both newcomers and crypto heavyweights - go sign up today. ======================= Pomp writes a daily letter to over 150,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at https://www.pompletter.com =======================

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano, most of you know me as Pomp, you're listening to the Pomp Podcast, simply the best podcast out there, let's kick this thing off. David Mercer is the founder and CEO of LMAX Group, which owns LMAX Digital, the leading trading platform for institutional investors. In this conversation, we discuss why institutions want to trade cryptocurrencies, how important latency and infrastructure is, how LMAX Digital is servicing customers, and what trends David is seeing on a day-to-day basis. I really enjoyed this conversation with David, and he obviously understands what he's talking about, so I hope you enjoy this one as well. Before we get into this episode, though, I want to quickly talk about our sponsors. First up is OKEX. Crypto moves fast, and many crypto-focused companies can't keep up.

• 0:47Anthony Pompliano?

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• 1:32Anthony Pompliano?

  to this asset class. On OKEX, you can easily use your credit or debit card to buy top cryptocurrencies with almost 40 different fiat currencies. Open an account today at OKEX.com/pomp. Again, OKEX.com/pomp. Go check them out today, let me know what you think. Next up is Exodus. Exodus is leading the world out of the traditional financial system by building beautiful, beautiful, user-friendly blockchain products. When I say beautiful, I'm serious, they have super, super slick designs. With its focus on design and user experience, Exodus has become one of the most popular and loved cryptocurrency apps. It's supported on both Desktop and mobile, allowing you to sync your wallet across multiple devices. So you can have access to your funds anywhere.

• 2:16Anthony Pompliano?

  You can instantly exchange around 100 different cryptocurrency straight from your wallet. Interactive charts let you view an asset's price history and your portfolio's performance over time. And maybe the best part, Exodus is integrated with the treasure hardware wallet, making advanced security easy for everyone. Visit exodus.com for your free download or search Exodus on the App Store or the Play Store. Again, exodus.com for your free download or search Exodus on the App Store or the Play Store. Lastly, don't forget that I write a daily letter to over 150,000 investors about business technology and finance. I break down complex topics into easy to understand language while sharing my personal opinion on various aspects of each industry. You can subscribe at pompletter.com. Again, pompletter.com.

• 3:00Anthony Pompliano?

  All right, let's get into this episode with David. I really hope you enjoy this one.

• 3:04Speaker 01

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 3:35Anthony Pompliano?

  David, what's up, man?

• 3:37Speaker 02

  All I want to know is you read out all those locations. Almost all of them sound better than a very rainy and wet West London today.

• 3:45Anthony Pompliano?

  Dude, I'm in Miami. I don't know how you're hanging out in the rainy London.

• 3:49Speaker 02

  I'm walking out.

• 3:51Anthony Pompliano?

  Awesome. All right, so let's jump into this for everyone who's paying attention on the live stream. We will take questions at the end. We're going to go for about 35, 40 minutes. We're going to have a conversation. So if you leave your questions, I will do my best to get them answered. No promises of yes to be questions. David and I will not answer them. All right, let's talk about your background, David, in terms of where did you grow up? And how the hell did you get into finance?

• 4:18Speaker 02

  Good question. But I grew up, believe it or not, born and bred in Belfast. So I grew up in Belfast in the seventies and somehow rocked up in London. And before my teenage years, and then I've been in London ever since. So I guess. From there on, how did I get into finance? Yeah, I would love to tell you I had some great plan. But actually, I started off, God help me, being an auditor. Then I somehow ended up in an investment bank. So I had effectively three decades of my career to date. Yes, that's how old I am. Ten years in investment banking, learning my trade. Uh, ten years outside of that, basically in brokerage firms, leaving capital markets for a little bit. Embracing the internet, trying to run an online investor relations business.

• 5:02Speaker 02

  And that's sort of learning how to run a business, uh, learning how to be an entrepreneur. And the last decade had been L Max Group, which is, uh, I say originally. Focusing on foreign exchange. So we operate five exchanges today. And from day one, it was in what we call FX, you know, the world's biggest capital market. Seven trillion dollars a day. Put that in perspective, Bitcoin's market cap, even at fifty six thousand pomp. Is only one trillion dollars. So foreign exchange trades seven times that every day. So. And that's what we've been doing for the last decade. And the last exchange, the last of the five exchanges we launched was L Max Digital, which we launched right into the crypto winter.

• 5:43Speaker 02

  You've got to be in it for the long term, guys. The crypto winter in twenty eighteen, we launched L Max Digital. So there's a. A whistle stop tour of me and L Max Group.

• 5:52Anthony Pompliano?

  I love it. So when you think of L Max Group, what are the other exchanges outside of the digital exchange? You got foreign currency. Are there specific geography focuses, certain types of trading pairs? Like, why are there four other exchanges?

• 6:03Speaker 02

  Yeah, good question, actually. And I wonder whether that will translate into crypto going forward. So. Basically, we operate three exchanges in London, one in New York, one in Tokyo. So in FX specifically, you operate, nothing ever happens on trading desk anymore, by the way. It's all algorithmic, it's the silent assassin now, which are algos trading with each other. And typically, they're in data centers, like the one we call NY4, so the New York Center, and is actually in New Jersey, right? So the one in London is actually further outside West London, it's in a place called Slough. And I couldn't tell you exactly where the Tokyo one is, TY3, but... So the reason for that is latency, right? Very simple, speed of light stuff.

• 6:46Speaker 02

  If you want to trade Euro in, in New York, you're best to trade with other customers in New York or in the vicinity, right? So there's fast links to Chicago, for example, from there. Likewise, if you want to trade in London, it's probably best that you trade there. So it's ultimately where people hold risk and where you exchange risk. So it takes, the round trip time is around 60 milliseconds between London and New York. So that speed matters in foreign exchange. And you hear a lot about HFTs, or we would call them non-banks or prop trading firms. So if you ever read, ever read Flash Boys, you'll learn all about it. So I wonder how, so that's really the, that's really how FX evolved.

• 7:30Speaker 02

  And I mean, I didn't invent that center, it's just, those are where the risk centers are, London, New York and Tokyo. I happen to think Singapore will probably take over as the Asian hub, a decade from now in, in FX. And you try and service those customers. Most of the global players, so most of the major banks and prop trading firms will trade in all three centers.

• 7:52Anthony Pompliano?

  Got it. And, and so what about crypto for the LMAX Digital? Is that just in one single physical location or geography?

• 7:59Speaker 02

  Yeah, so today, well, distribution wise, and it would be global. So I mean, LMAX Group has customers in a hundred countries. So I like to think a lot of them would also be trading digital. My overlap today, just facts and figures, and 40% of LMAX Digital customers trade another asset class with me. What that means is they trade FX, but all the matching, so those silent assassins, if you like, currently happen in London, right? Latency doesn't seem to be a big thing, probably because of the... If you like retail nature of the market in startup phase. So people are trading longer term views. It's not about milliseconds yet. Certainly not even in seconds, mostly it's days and weeks and months.

• 8:43Speaker 02

  So even the guys who are very tech enabled can send their prices from New York, Chicago or Singapore or Hong Kong. And be pretty content the prices they're trading on. I wonder if I'm honest with you, Anthony. Um, what will happen going forward? You know, we're well set up to have matching engines all around the globe. If you think about a DeFi world. Uh, where latency becomes important, for example, where price discovery becomes important, right? So how do you price that underlying asset? I do wonder what will happen in the next decade, but um, let's hope it doesn't follow the expensive infrastructure route of traditional capital markets, but it's possible.

• 9:23Anthony Pompliano?

  And so is the thought process that maybe as more and more high frequency traders and kind of electronic trading comes into the market? That may drive a greater desire for the uh, low latency? And then that would force you guys to go just for matching everything in London to kind of those three hubs or maybe even more hubs over time?

• 9:41Speaker 02

  Yeah, I I'm I'm all pretty certain that will be the case. Um, but by the way, I think that low latency trading. AFT, if you must, benefits everyone in terms of liquidity provision, in terms of precision in pricing. Right? So you see a lot of, at the moment, you see a lot of exacerbated exacerbated price dislocation, market dislocation. That starts from, say, a retail platform out of the Seychelles or Panama or Hong Kong or wherever it is. And I think you need these guys to be playing in the market to have that precision of pricing to every millisecond. Certainly every second of the day.

• 10:21Speaker 02

  And then I think that creates more opportunity for every, all the participants in the marketplace. At the moment, you'd know. Probably better than me in this. There's a lot of, let's call it in inverted commas, arbitrage in the market. Everyone thinks they've found the arb between the spot and the future, right? Or between this matching engine in London or New York or Chicago. In fact, it's just credit spread, right? The arb is so clear, I can see it with my naked eye. In foreign exchange, allegedly it exists, but if there's an arb, it exists for a millisecond and it's closed up by someone in the market. That makes for an efficient market infrastructure and efficient pricing for everyone.

• 11:05Anthony Pompliano?

  And so when you think about that credit spread, explain that a little bit more, right? So this is something that you and I can say, hey, on one exchange, I can buy Bitcoin for, uh, let's say today fifty three thousand dollars and I can turn around on another exchange and sell for fifty three, uh, fifty six thousand and therefore I can make three grand?

• 11:19Speaker 02

  Yeah, that's what people are saying. And they're going to be, David is arbitrage. I'm going, well, it's not arbitrage, right? It's called credit spread in there because what you're having to do, it's really capital intensive. You're having to put your dollars or your tether in one location and your coin in another location. You have to run both positions and you're going, look, look at this. Now, you have to close it out. So how, how wide is the spread whenever you close it out in both, uh, on both exchanges? And are you sure they're both going to give you the coin and the dollars, right? Now, we know that doesn't always happen. Um, and then you've got also, how long does it take you to get the tether exchange? How long does it take you to get the dollars back, right?

• 12:00Speaker 02

  Because people forget also, you know what the financing rates are today in the crypto market. So that can be hugely expensive if you're waiting three days for your dollars from some bank in Bermuda or the Bahamas and I give you your coin immediately, right? So you need to be able to turn it. So I think people need to be very careful about what looks like a price arb. Normally in traditional capital markets, that price of is you pay for that through credit risk.

• 12:27Anthony Pompliano?

  Absolutely. Before we keep going, everyone who's watching right now, smash the like button so more people can see David and hear all of his genius remarks. If you don't smash the like button, then can't be friends. So go ahead and do that. So more people on the platform see it. David, what I want to talk about is LMAX Digital specifically, the legacy world. I'm not a fan of, obviously. In this new world, we're seeing cryptocurrency exchanges pop up, it seems like every day. How do you think about what you guys are doing and what the differences are to kind of the competition or peer group that have other exchanges?

• 13:01Speaker 02

  Yes, I envy you, right? And a lot of the guys like the tall fellows who are always on Twitter all the time, just to be a crypto evangelist, right? So I'm very envious. I guess LMAX Group and LMAX Digital, we straddle the two. I make no apologies for that. So we straddle traditional capital markets, the status quo. And then hopefully the new market, right? So creating a crypto ecosystem and moving into DeFi. Now, it's important, we're going to need some of that plumbing. We're going to need some of that credit intermediation from traditional capital markets, right? We need institutions to really start trading this product, be it Bitcoin or any other coin, right?

• 13:46Speaker 02

  And we need their customers to get comfortable holding it, trading it. I'll give you the best quote ever. It's all very well, Anthony, that you understand wallets, that you understand how to secure your assets. It's all very well that you understand how to move your coin around the world and you're comfortable and understand those risks. I had a very, you know, established customer of a large investment bank, say, the other day.

• 14:12Speaker 02

  I don't care. I don't wanna know about vaults. I don't wanna know about wallets. I just want access to the product. I wanna buy Bitcoin when I think it's going up, but I wanna sell it when I think it's going down. I wanna trade it the way I trade the S and P, the way I trade the Euro. So it's where Almex Digital comes in, hopefully, and guys like us. So if you like, I don't like to use the phrase dumbing down, but making it fungible with other products they trade. You want, what you, Anthony, wants, what every crypto fund in the street wants is you want some of the hundred and ten trillion dollars of assets under management

• 14:54Speaker 02

  to be put to work in crypto. To give you an idea, this is why I'm bullish. This is why I'm a big fan of the market. Personally, why I'd be a fan of Bitcoin is the market cap of Bitcoin today is one trillion dollars, as we discussed. If just five percent of the assets under management in the world were allocated to Bitcoin, very simply, the price has to be two hundred and eighty thousand, right? Just to satisfy that demand. So we need some familiar infrastructure where not everyone has to be an expert in blockchain. So specifically, we came in to help oil those wheels for existing institutional customers, not that familiar with blockchain, perhaps a time port,

• 15:38Speaker 02

  but wanna allocate some of their portfolio to the crypto ecosystem. And I think you're starting to see that today. I mean, look, I take my hat off to the retail platforms out there. Some very famous ones go into listing in the next week or two. They service a segment of the market. You know, they have forty-three million customers. I have a few hundred, but those few hundred have access to trillions of dollars that could come in to the crypto ecosystem and benefit everyone, benefit Bitcoin, benefit everyone that believes in crypto. So I hopefully that's the gap we're trying to fill. And I want everyone to do well in there. I want other people like prime brokers to come in. I want big names. You saw some announcements last week.

• 16:22Speaker 02

  I want big names to come in and in the custodian space. Why do I want that? Just because that guy that says, David, I don't care, just puts his money there and hopefully that on ramp, then hits Almex Digital or other exchanges and they start to trade.

• 16:37Anthony Pompliano?

  So what's really interesting to me is you sit in this fascinating seat, right? You've got a great legacy business in foreign currencies and have a whole FX market. You now have this crypto exchange. You're able to tell your existing clientele, who are some of the largest asset managers in the world, the most professional traders, hey, we have a crypto exchange. You should go and you should trade cryptocurrencies on that. We're going to use our state of the art, kind of low latency technology and exchange infrastructure. We're going to apply to this new market, go trade. Is there ever a conversation about maybe putting them together? So allowing somebody to trade everything from one single location or one single exchange? Or is there a benefit to actually keeping them separate? So you've got a crypto specific exchange and you kind of have your other exchanges that have no crypto on them?

• 17:21Speaker 02

  Hundred percent hit the nail on the head. I guess that's why you have the followers you have. And look.

• 17:26Anthony Pompliano?

  I've done this once or twice.

• 17:29Speaker 02

  You can't tell, you can't tell.

• 17:32Speaker 02

  My personal view is it's a partition wall between traditional capital markets and crypto today. That was done for a reason. If you like, that was also done at LMAX Group. So LMAX Digital sits at a separate group under LMAX Group and distinct from LMAX Exchange. For me, I view Bitcoin as an 81st currency pair, right? You want to trade dollar mix, you want to trade euro-dollar, you want to trade the S and P, you want to trade NASDAQ, you want to trade gold, oil, you want to trade Bitcoin, you can do that. Actually, without trying to confuse your viewers too much, I have a regulated NCF, regulated by the FCA, and I have regulated instruments that are crypto friendly there.

• 18:13Speaker 02

  So you can trade, you can trade basically the leveraged Bitcoin dollar, Ethereum dollar right now, today. So it's already in one spot. I think we need the regulators and the bank regulators to have some approvals in place. And then I think in 2025, you'll trade all my currency pairs alongside Bitcoin, Ethereum, Polkadot, whoever knows what's next. I would love a scenario where you trade Bitcoin against everything. And I think we can help deliver that because.

• 18:54Speaker 02

  The, one of the good things about LMAX Digital is if you trade foreign exchange with me, it's the same software, it's the same API, the same market data feed. So I've got ten global investment banks today taking my LMAX Digital market data. Now, they're not trading yet because they're waiting for either internal or external approvals, but down the line, it's as easy as flicking a switch for them. So, right now, I think because of regulatory constraints, because of some weariness in the market, not everyone wants to touch crypto yet, we keep it separate. But the benefits down the line are to keep it separate so that if you don't touch it,

• 19:37Speaker 02

  you're not tied for that brush. But down the line, the benefit will be, hey, come to LMAX Group, trade it all in one place, be that London, New York, Chicago, or Tokyo.

• 19:48Anthony Pompliano?

  Makes, uh, makes complete sense. Uh, as we think about this, talk to us about kind of what's transpired so far. So you, uh, and your team decide to launch LMAX Digital, you launch it right into the teeth of the bear market. Uh, you're still here, you're still standing. So kudos to you, uh, probably being rewarded over the last couple of months for all of that pain that you took, uh, in the beginning. But how is it going so far? Any data or numbers that you can share with us in terms of, uh, how LMAX Digital is doing in the institutional adoption?

• 20:17Speaker 02

  Sure. So I think most importantly, for you and for I and for everyone, it's the most fun I've had in capital markets, the most fun I've had at LMAX, right? So the last five months have been a lot of fun. Now, when we launched it in 2018, we launched it, believe it or not, on demand from our institutional customers. Very simply, they said, David, we need some institutional, industrial-grade infrastructure where I can exchange risk with like-minded participants. That's it. We listened to them. It overtook some other priorities I had within the group about expanding our reach in FX products, and we put it out there, just as Bitcoin, of course, started to crash. But the good news is, I always think exchanges take...

• 21:02Speaker 02

  Anywhere between two and five years to know whether they're going to succeed. And so we just came in, we were patient, we went for the long term opportunity. We saw what was happening happening underneath the surface. I didn't know whether the pump from Pomp was going to happen in December nineteen or December twenty. But then when it happens, I keep plugging in every month. We had new users, new banks, new taking our market data, new pro trading firms. And connecting and they're not trading very much, new brokers connecting, not trading too much. Then suddenly, bang, so twenty twenty in total, we traded a hundred and seventeen billion dollars worth.

• 21:47Speaker 02

  In Q one twenty twenty one, we've already traded more than that. In January this year, we traded over sixty billion dollars worth of crypto. So average average daily volumes of over two billion a day of crypto. Where does that come from? By the way, it makes me look dumb because I just put in a budget to the board and they're going, oh, David, how come you're wrong by three hundred percent? Well, okay, I didn't know Anthony was going to pump it up. Um, but that's what happened. So we're pretty happy with what happened. What I would say to everyone and a note of caution to the market out there is that I'm giving you dollar numbers. That's a bit and everyone on the market is doing that, but Bitcoin did most of it itself, right?

• 22:30Speaker 02

  Closing price was twenty nine figures, I would say twenty nine thousand in December. It doubled to fifty eight thousand. So by doing nothing, your volume doubled. What I look at though, and this is key for me, what I look at is the average coin traded. The average coin traded last year in L Max Digital was six hundred thousand coins a month, right? This this year to date, the average coin traded is one point three million. So forget my dollar notional because I'm just going to tell you that it's four or five X. But two X of that should be taken cover on the taken care of by the price rise. So yeah, we're happy.

• 23:10Speaker 02

  I think what's important though, Anthony, for for me, for L Max Digital, for the market is wherever you are in the marketplace, you want to be in that position in five years' time. We're just getting started in terms of.

• 23:25Speaker 02

  The crypto ecosystem, the crypto market and the LMAX digital. I'm certain, you know, we did, I think 10% of the legitimate spot market in December and December and January. I want to still be 10%. I want to be the de facto institutional exchange. Whenever this market is 10x and believe it or not, I think 10x is only a few years away. 100x is my, is my forecast and when we're talking 2030 and beyond.

• 23:54Anthony Pompliano?

  So you think that Bitcoin 100x would be $5 million per Bitcoin?

• 23:59Speaker 02

  100x, sorry, in terms of the Bitcoin is a million dollars for sure. It's a million dollar asset. So that's for sure.

• 24:05Anthony Pompliano?

  I agree, I agree.

• 24:06Speaker 02

  Ecosystem, I just look, so I'm a, I'm a trading volumes type of guy.

• 24:11Anthony Pompliano?

  Okay, explain this further.

• 24:14Speaker 02

  Okay, so market cap of Bitcoin today, $1 trillion. FX market, $7 trillion traded every single day. Legitimate spot market, legitimate spot market in crypto today, you're talking 30 billion. Okay. If you tell me 50 billion, I'm not going to argue too much with you, right? 100 times that is only 3 trillion, is only five, or 100 times 50 is only 5 trillion. Is that possible a decade or two from that? I think it's inevitable. Certainly, when you look at, let's look at gold, people talk, call Bitcoin digital gold. The market cap of gold is 10 billion. Uh, sorry, 10 trillion, 10 times Bitcoin.

• 24:58Speaker 02

  It trades today around 300 billion a day, so 10 times what the legitimate Bitcoin market is or crypto market is. I think crypto and Bitcoin will overtake gold three years from now. And I can't see why it doesn't when it's looking like it becomes a, an asset that traditional um investors, money managers, asset managers will hold in their portfolio. A traditional, an asset which um every corporate treasurer is going to have. You know, you ask about me, it doesn't matter whether I'm an evangelist or not. I'd be dumb not to have Bitcoin as part of my treasury system today. You know, we allocate only.

• 25:43Speaker 02

  Five to six percent of our assets to Bitcoin because we're not a fund, right? But if I'm gonna hold it in dollars and euros that pay me nothing and sterling that pays me less, right, then I've got to hold some, I've got to hold some in Bitcoin. So, yeah, a hundred X, a decade, two decades from now, ten X, literally, I think it's a bit touching distance, right? We'll talk before 2025 and it'll be ten X for sure.

• 26:09Anthony Pompliano?

  So this is fascinating to me, right? You come from the traditional FX world. You, by all measures, at least from my, I understand, are not what I'd call like a Bitcoin ludite or a crypto ludite, right? You're not banging the table that the state is gonna fall apart or that the fiat currencies are gonna go away. You're simply saying, look, this has value. I see the institutional clients that I have, they want to trade this thing. And I believe that it's small today compared to the traditional FX market, but it's gonna become much, much bigger over time. But with that said, what you're doing is, and I think it's incredibly intelligent of you, is you're saying, look, I'm gonna treat this just like I treat every other asset that we trade. So if we're gonna hold dollars, if we're gonna hold euros, if we're gonna hold whatever on our balance sheet, we better damn make sure that we're holding Bitcoin as well.

• 26:53Anthony Pompliano?

  And it's not gonna be 50% of our balance sheet, but it's gonna be some percentage. Is that kind of a fair summary?

• 26:58Speaker 02

  A hundred percent. You know, put simply again, I can't be Michael Saylor. I can be somewhat more like Elon Musk, right? I wish there was a dollar behind both of them, by the way.

• 27:09Anthony Pompliano?

  I tend to agree with you. So let's talk a little bit in terms of what you're seeing from the actual institutions themselves. Why are they coming to trade this? Is it because they think they can make money? Is it because they've got fear and they're running from kind of traditional markets? Is there some macro issue? Is it just you're an amazing salesman and now they want to go trade on LMAX Digital? Like, why are they coming to actually trade?

• 27:32Speaker 02

  Yeah, it's a bit of all of those, apart from the amazing salesman bit. I mean, look, all I do, we do a very simple thing in all our exchanges. We just match buyers and sellers, right? So we like markets and move and we like to try and meet our customers' needs. So I think there's nothing wrong with making money. So some people are in it because they see the gaps, the potential, as I said to you earlier, price arbitrage, the opportunity for them to make money in crypto. And right now, you know, everything is a bit...

• 28:06Speaker 02

  A bit of a retail market. Spreads are a bit wide, commissions are a bit high, custodial charges are a bit high, transition charge, transition of money or payments are a bit high. There's a lot of compression has to come in. So some of them are doing it for that reason. The main players, if you look at the banks, the investment banks entering the space, it's actually to facilitate customer demand, right? I mean, there's a well-known head of the biggest investment bank in the world said recently that they, I'll put it in English, right? He said that the banks, etc. should be scared witless. He didn't quite use that term. He should be scared witless of fintech and blockchain. Because

• 28:50Speaker 02

  simply, as I say, look at the big crypto names or big crypto platforms out there in retail land, they've got 40 million customers. Those customers used to belong to the bank. So you've got to wake up, you've got to try and you've got to try and serve those customers. Otherwise, they're going to trade elsewhere. And guess what? When these new startups, relative new startups, been going less than a decade, have a war chest, right? Have a real balance sheet. What's to stop them moving into traditional markets? So that's a bit of fear, maybe, but also a lot of, hey, we've made a living all these years out of servicing our customers. If my customer calls up and said, you know, I want to buy a million dollars

• 29:31Speaker 02

  worth of gold, I have to be able to do that. Even though gold is really difficult to buy and move around the planet, right? It's really, really hard, but people like it. Go store it for me. And they also trust you to store it. And I send customers by going, hey, can you just get me, I want to diversify, buy me 5% of my portfolio in Bitcoin. So they have to do it. So a mix of the three, yes, a good opportunity to make money, yes, some fear, but moreover, just serving the core customer base.

• 30:01Anthony Pompliano?

  So my understanding is you have no retail customers. This is all institutional spot trading, and you're doing a very good job of doing it. Will you have plans in the future of serving retail? Or is the bread and butter in the institutional world, and that's where you think you guys will stay?

• 30:17Speaker 02

  That's our niche. Institutional segment is our niche. It's what we're good at. It's what we know. I take my hat off to Brian and guys like that. They're very good at sales and marketing and onboarding and serving that segment of the market. You know, frankly, if after this great interview, you had a million applications, it would probably take me about three years to get through them, right? So the retail guys out there are brilliant at onboarding it, at doing the checking and servicing that customer. I don't see us making that leap ever. What I'd like to do is service that broker segment. So go back to my bread and butter, go back to my FX market. I have 200 retail brokers as customers of mine.

• 31:02Speaker 02

  What does that mean? Who cares, David? Why should anyone watching this care? Well, I deliver institutional-grade pricing to those 200 brokers. Those 200 brokers are much better than me at servicing their customer. So they take my institutional price, deliver it out there, and they give you nice statements and nice charts and technical analysis and maybe some YouTube videos like this, right? And they look after you really well. But what you have is, and this is the beauty of modern capital markets, is you have institutional market access. So I'd like to service them more. And some of the bigger names in crypto are already taking our prices and taking our liquidity.

• 31:44Speaker 02

  And I think that just means we do what we're good at, which is delivering exchange technology, matching buyers and sellers. You do what you're good at, which is sales and marketing and customer care. And at the very back end, right, you're looking at the liquidity providers, for example, who do for a living. They take risk for a living. They provide efficient pricing for a living. So I hope that ecosystem evolves within crypto. And certainly, that's why I see Almex Digital playing a place in the next 10 years.

• 32:15Anthony Pompliano?

  For sure. Right now, my understanding is most of this volume and client base is coming to you to trade on your exchange. Walk us through kind of, are there APIs where other people can partner or take pricing, take volume, liquidity? How do you kind of look at working with other people in the ecosystem? And how much of this is you want to be a kind of a platform play versus a destination for people to come and trade?

• 32:39Speaker 02

  You name it, we have it, right? So um we're agnostic to how you want to trade. So again, I look at my core business. I think today I have thirteen thirteen, might be fourteen as of yesterday, aggregate is plugged in. That means someone likes to trade a futures view, someone likes to trade a spot FX view, someone likes this technical analysis or these charts, someone um likes to use this algo to trade. I'm agnostic. So our API is standard. We have Java, we have dot net, we have fix, we have each. However, you want to consume the price data, you consume the price data. However, you want to trade,

• 33:21Speaker 02

  I don't mind. Um likewise, we contribute to a few indices out there. Just give our market data there, so out to those indices. So then hopefully we can drive derivative products. Now, what I what I hope there is that if you're trading derivatives off indices that are driven from my pricing, then when you want to hedge, you want to delta hedge, you'll come to L Max Digital. But of course, my core bread and butter is matching buyers and sellers. So I'd like, when I when I I'm agnostic and I send out all those links or all those onramps, I hope that the end customer, some of that flow will make its way through to L Max Digital. And that's traditionally what happens in any exchange, infrastructure or ecosystem.

• 34:02Anthony Pompliano?

  For sure. Uh before I ask my last question, if you're watching this on the live stream right now, make sure you smash the like button and then leave your questions in the comments. I can see all the comments and I'll start asking questions here in about five minutes. So if you have questions uh for about L Max Digital uh or anything else you've heard today, leave your comments uh there and we'll start getting through those here in a minute. Uh one of the questions that I want to talk about though, and I think is probably not as well understood uh outside of maybe the the core uh people who really pay attention to this every day is we are seeing a massive outflow of Bitcoin from exchanges, mostly in retail exchanges or or very large exchanges. But this is people that are coming in, they're buying Bitcoin and they're choosing to withdraw that Bitcoin into

• 34:42Anthony Pompliano?

  cold storage into their wallet, wherever they're taking it. Uh and so there's a uh school of thought, again, nobody knows for sure. happen in the future, but there is a school of thought that as that kind of supply on the exchanges goes down, more people are coming into the market. You almost get this like short squeeze phenomenon, right? Where price has to go up significantly in order to accommodate that new demand with a decreasing supply on the exchanges. One is just, what are you guys seeing? Can people withdraw Bitcoin from the exchange? If they can, are you seeing that happen? And then two is kind of just from a philosophical or structural standpoint. Is that something that you guys pay attention to? Do you have concerns there? Or is that maybe a positive sign? Like, how do you just think about that?

• 35:23Speaker 02

  Okay. A lot of questions in there, Anthony, but I'd say, yes, it's happening, right? Because a lot of people, you know, you're one of the ones, hodlers, right? All the hodlers, that's not great for a pure all exchange guy, right? I only, you know, we only do well, I only get to pay the bills, I only get to pay for the light switches when when people buy or sell. But yeah, at the moment, it's an investment asset, right? Dare I say it? Bitcoin itself is now a store of value? Wow, that means you might buy it and hold it. So I think it's okay. I mean, the coin doesn't, doesn't have to live on exchange. It shouldn't live on exchange, right? If you really are an investor, buy it, store it however you see fit. Now, that might be in Almex Digital custody. Yes, everyone.

• 36:09Speaker 02

  We, we, we have a custodian solution, but we, we didn't set out to be that. Store it with one of the other custodians around there. Store it yourself. It's not that difficult. If you're in the crypto space, I think you'll work out very quickly how to keep your private keys safe. So yeah, that's certainly, that's certainly happening. I think what we need as part of the market is we need, in traditional parlance, we need an efficient repo market. It's not efficient today. It's very, very expensive. Now, what's gonna happen?

• 36:40Anthony Pompliano?

  Explain it real quick before you go on. Explain kind of what that means when you talk about the repo market. And for the, some people may not understand how that works in the traditional world.

• 36:48Speaker 02

  Yeah, look, I think that happens, I think it happens a lot. The easiest way to look at it is probably gold, right? You own gold, right? You hold it in a vault. And then someone says, hey, Do you want to earn some interest on that gold? Because actually this piece of metal sitting in a vault doesn't earn you anything, right? But I can actually make it work for you because someone else has got a view on gold, they're going to sell it. But they need to cover that that that short position. So we're going to lend them that gold so they can deliver it. And and you're going to work, they're going to pay some interest for that. And that's what's happening with Bitcoin today. And certainly even more sometimes with Ethereum. There is a shortfall. It's back to the arbitrage of moving coin around the system. Or dollars around the system. So we need a maybe a simpler way of looking at it is stop borrowing and lending.

• 37:33Speaker 02

  It's okay to take a view, you know, go short Tesla if you want. I wouldn't if I were you, but go short if you want. But then someone someone has to put that up. So if you go short, someone's going to say, hold on, who's delivering the Tesla to me? Ah, hold on a minute, I'm going to borrow it for you. So you go over here, you borrow it, you lend it out. And the lender says, okay, it's going to be X percent per annum to borrow that. At the moment, the rates in some coins and in Bitcoin at times are written, you know, high double digits. I mean, it's it's that's scary. Now, why is that repo market or that borrowing market not efficient right now? Because who are you lending it to? Where's it going? Where's the transit? Are we sure the channels are in place so that you know he's going to give it back to you?

• 38:18Speaker 02

  So in the grown up stock market, for example, someone's lent you Tesla. Thank you very much. But it's probably a bank, right? Or a regulated broker. And they're giving it to another regulator then. They're pretty sure they're going to get it back. So the repo market at the moment is you're not quite sure who's getting it, who you're giving it to. So we need some grown up credit infrastructure to facilitate that repo market. And then overall, again, the market will be efficient. So not every asset held in a vault. Is valueless or earns nothing, right? We can put it to work. I think this is a very exciting part of the market. It will make it much more efficient going forward.

• 38:59Anthony Pompliano?

  All right, we got a ton of questions from people. Uh, I'm gonna fire them off. We're gonna start with a fun one first. Do you support England or Ireland rugby?

• 39:09Speaker 02

  Ireland, 100%. Not open the question. In fact, I support ABE, anyone but England.

• 39:19Anthony Pompliano?

  You, uh, you already know that the trolls, uh, you're trolling the comments, which is, uh, which is good. We're off to a good start here. Uh, all right. So, uh, uh, one question comes from Lord of House Stewart, uh, which is a fantastic name. Is David looking to expand LMAX to move toward being a crypto prime broker custody, lending, borrowing, et cetera? Uh, kinda how do you think about where you guys are today and expanding the offering? Or will you just stick with more of kind of the exchange infrastructure?

• 39:46Speaker 02

  I think we kind of do that. That's part of the, I mean, the crypto ecosystem is so nascent. They, I don't have a prime broker out there, so I have to prime for customers. I prime for my brokers already. So if you like, I have a bunch of institutional liquidity providers. They wouldn't onboard necessarily or face my customers on the other side. So LMAX Digital is basically the principle on a lot of those trades. So I effectively clear already for brokerage customers or smaller funds that wouldn't be known. So in the banking environment or more established capital markets, you go to name a bank, ABC Bank, XYZ Bank. You deposit your funds there, they prime you onto LMAX Exchange.

• 40:29Speaker 02

  That plumbing isn't available today in crypto, so I do it. Do I think down the line, there's space for better primes? People who do purely that as a, as a living? Yes, 100% they do that. Another question they asked there was, uh, do I provide custody? Yes. Do I think custody is a big business going forward for someone like us? No. Right? It's very low margin business and funny enough, it's linked into that Reaper market I talked about. But there's no, I can't just open a bank account like I can in my lovely Fiat business. I just go, hey, send me your dollars, Anthony. Yeah, and I'll stick it in with Bank of America, JP Morgan, Goldman Sachs, other banks are available. Right? They take care of all that for me.

• 41:12Speaker 02

  And it doesn't happen with Bitcoin. I have to store it. So yeah, we have to have a very secure storied solution. We have to understand cold wallets and vault wallets. So we do it today. And in 10 years' time, I'd love it if there was bigger names in the market doing that and on ramping, providing up on ramp for customers to trade on LMAX exchange.

• 41:33Anthony Pompliano?

  Yeah, it makes sense and it's one of those things where you just do it out of necessity, but I agree with you. Commoditized business over a long period of time. Next question comes from Tom Sen, who says, do you think that the next market downturn will not be as drastic? Because cold storage is becoming more popular and it discourages panic selling because of the difficulty. And the context here obviously is in the past, there's been multiple boom and bust cycles in Bitcoin. And if all of a sudden now you have different types of investors or holders in the institutions. And then also as more and more Bitcoin moves off exchanges, how do you think that changes a potential drawdown?

• 42:05Speaker 02

  Yeah. So I don't think it's purely down to cold storage. It may have very little to do with that. Yes, I think I don't, yes, a double negative. I don't think the next downturn will be as drastic, dramatic. Incidentally, I think this is important to all the evangelists out there. You're probably, you could probably tell me more accurately on the chart. 16th of March, 2020, right? Bitcoin was in freefall, literally like that. It looked like it was going to zero. I'll give you another chart. Oil looked like it was going to zero. Now here's what happened. All traded below zero, right? They paid you to buy oil. Somehow or other. I'm looking at the chart thinking, wow, look at this Bitcoin thing. It hovered just above the mining rate, funny enough.

• 42:49Speaker 02

  Call it three thousand eight hundred, something like that. That was for me, the second coming. The real birth, if you like, of Bitcoin, because then it's just gone steadily up since then. It showed resilience, resilience of an asset class, right? You kidding me? It was better to hold Bitcoin than oil? Right there and then? Wow. This showed that this was an asset class that was going to be here for the long term. So, look, you've been around it long enough. We're gonna see cycles. There's still this, um, we're gonna have market panics. Normally started in the stock market. They're like it or not, Bitcoin's slightly correlated now.

• 43:33Speaker 02

  So when there's a sell off, you're gonna see the sell off in Bitcoin. And could you see a thirty percent drop from here? Absolutely. You know, will it trade in the forty thousand again? Probably. Could it trade in the thirty thousand again? Maybe, right? Does it matter? No, not if you're a long term investor. I've already told you what my price predictions are. So, and I think again, back to the institutionalization of the space. There will always be a bid, right? When the institutions start to play. Oil couldn't find a bid. It was actually more about delivery and fulfillment. There was no bid for oil. It looked like there was no bid for Bitcoin, but there was a bid. Because the miners worked out, hey, I can still buy it here and make money, right? I can still produce and make money.

• 44:15Speaker 02

  So, um, when the institutions come in, there will be bids. So you'll be getting people buying it all the way. Right now, when you see a gap, they'll be buying it all the way down, so to speak. So I think that's better. Um, but certainly we shouldn't. Bitcoin and crypto will not be immune to market sell offs in future.

• 44:36Anthony Pompliano?

  Yeah, there's somebody who's got a question about age and demographics. It's interesting because for the retail platforms, they think a lot about, you know, who is their customer? What does that age and demographic look like? It tends to skew younger compared to older and just all the things you know about technology companies in general, especially consumer-facing ones. For you, do you see any sort of age or demographic differences between the decision-makers, between the institutions that you're working with? Or any sort of, maybe I'll call them like personas that you guys have identified where you're seeing much more adoption or excitement than in other groups?

• 45:12Speaker 02

  Yeah, probably not age and demographics so much. Okay, for everyone, I guess I'm the old guy. Most of my company is younger, right? So the head of my LMAX digital operation is younger than me by about two decades.

• 45:25Anthony Pompliano?

  Your age is a good experience. It's not age, it's experience.

• 45:29Speaker 02

  There we go. There we go. I think what I'm seeing is the institutions that are coming in are... They like risk. They like trading. And absolutely, you couldn't put age down to it. One of the biggest trading groups in Bitcoin today, in the market, not just in LMAX Digital, have been trading for decades, traditional capital markets, right? They love the markets. They love new markets. They like making markets. They like providing liquidity. And they're agile. You know, go back to that phrase again of an HFT or a prop trading desk, prop trading firms.

• 46:11Speaker 02

  They've been around for a long, long time, but they're adapting all the time to low latency. They're adapting all the time to new products. So that's what you're seeing. And before we all go and decry the banks and say, oh, they're slow, look, they're just massive hulking organizations that have lots and lots of approvals, both internal and external, to fulfill before they trade it. Talking about age, demographic, or even experience, there's a lot of younger guys who love crypto, who love Bitcoin, working in banks today. Just their desk doesn't quite trade it yet. But they will, and you know, when they come, they're going to be big. And when they come, they're going to be good.

• 46:57Anthony Pompliano?

  That is both facts right there for sure. There's some questions about governments and how you think about should governments hold Bitcoin? Should they be a little bit more adversarial against it? How do you think that'll play out?

• 47:12Speaker 02

  Good answer. Yes, they should hold it. I mean, look, what's the UK government doing? What's the US government doing if some of their some of their reserves are held in Bitcoin? Funny, I had a different question the other day.

• 47:25Speaker 02

  More about the FX markets. And we talked about Bitcoin becoming a reserve currency. Well, there's $12 trillion today held as currency reserves the world over. 60% of it is in dollars, 20% of it in euros. After that, the next biggest is the pound at 5%, RMB1 at about 5%. I didn't see Bitcoin anywhere. What are they thinking? What are they thinking with my pension? What are they thinking with my taxes? Right? They need to do it. And remember, the evolution of the market, I sense the impatience of yourself and the crypto evangelists out there. But remember, this monetary system, the US dollar itself is only really 50 years old.

• 48:10Speaker 02

  Right? Did you know the pound was the world's reserve currency? Before that, in between times, you had Bretton Woods and the gold standard. So, yeah, I mean, look, I think if countries aren't looking at it right now, then there's something amiss. And there's some appointments, you've seen it in the US, you've seen it in the Fed.

• 48:31Speaker 02

  I hope in the UK, they're hiring some younger people with a different outlook, with some experience of crypto. So, yes, they should hold it. I hope they do. And I'm certain, by the way, they will do going forward. In terms of will they outlaw it? You know what? Let's make it big enough so they can't. You can't now anyway, right? What are you gonna do? Make us all criminals? No, right? What they will do is build a regulatory framework. And I am, there's one thing I, you know, I would I would nod to in terms of that. We need to protect private investors. We always should.

• 49:07Speaker 02

  That doesn't mean ban them. It just means protect them, advise them, recommend them, make sure they understand the risks. Right? So you're not going to find me ever offering a hundred to one leverage to a private investor on Bitcoin, right? And that is irresponsible. So yeah, look, allow some of the regulators to come in, allow some framework. But I believe the great and the good across the globe will let this industry breathe, will let this asset breathe, and that again will be beneficial for everyone.

• 49:43Anthony Pompliano?

  Completely agree on that. We're getting some questions about borrowing Bitcoin. When that becomes cheaper, will that drastically increase the shorting of the asset?

• 49:53Speaker 02

  Yeah, so what? It'd be great, right? You'd end up in an efficient market. Wouldn't it be good shorting it, naked, naked selling? Is that so bad? Or what about you just hedging, you know? It'd be great. Can't we all just have it in our portfolio? I'd love to have it in my pension, just have it in my pension. So that means I'm long for decades, I hope. But then hedge it day to day, right? Someone takes a naked short position. Okay, we've all seen the big short. Okay, let's find out where the bottom is. So that lower cost of credit means you have an efficient market, right? And that means you haven't just, at the moment, you can be two, you can be, I guess you can be

• 50:36Speaker 02

  three things in Bitcoin or crypto. You can be wrong. Okay, so let's forget those guys, right? And you can be, you can have, you can be, have no position, right? Or you can just sit and hold on for dear life. No, no, no, no. Let's have an efficient market where I can take short-term views or I can sell, right? And this is how markets, this is how markets evolve. Wouldn't it be great? Imagine the old open-cried trading floors. Wouldn't they, wouldn't they be fun in Bitcoin, right? Imagine trading places on Bitcoin. Forget frozen orange juice. Someone should make that film, right? Except on Bitcoin. So imagine that. Some dummy over there is going to be shorting it forever. Good! You'll be on the bid, someone else will be on the bid.

• 51:20Speaker 02

  So yeah, I think an efficient market, an efficient repo market or lending market will make for greater efficiency overall.

• 51:27Anthony Pompliano?

  So I want to end with two last questions. One just came in. That's pretty good. This says, given the recent big boys' interest in crypto, mainly Bitcoin as an investment, what do you think about the other newer aspects of crypto, DeFi, NFTs, and everything outside of Bitcoin?

• 51:44Speaker 02

  Great. So NFTs, I know virtually zero about. So let's pop that. I'll leave it to someone who knows. You can tell them later. And DeFi, I love it. Okay. I love the theory of it. Absolutely. My idea of trading everything against everything, tokenizing the world. I love it. It's hard to participate in it right now. I think it will change capital markets, right? I take my hat off to everyone that's investing time in it. I hope they do fabulously well. I think in DeFi, 2021 is the 2013 of Bitcoin. So don't worry, you're not too late. If like me, right, you didn't have an account with a Uniswap,

• 52:29Speaker 02

  and you weren't exchanging tokens until a few months ago, you went too late. A bit like you went too late to Bitcoin in 2013. So I think it's got a long way to go. And I think we can help. Almex Digital, Almex Group can help. I think you're going to need oracles, sources of price discovery. You need to know the value of assets when you're exchanging those, swapping them. Smart contracts need to know how to value it, right? You need to really make sure it's riskless. But yeah, let it fly. Let it fly. I think DeFi could well be the third industrial revolution of our times. We had to wait hundreds of years for this, for the second one, right?

• 53:11Speaker 02

  It really could be phenomenal. And I hope we could participate in terms of being an on-ramp, whether that be through fiat, through Bitcoin, Ethereum. Obviously Ethereum is the main one at the moment.

• 53:25Speaker 02

  And maybe as members of pricing source going forward, but yeah. And wonderful progress in capital markets, in my opinion.

• 53:34Anthony Pompliano?

  Let it fly. I love it. I end every interview with with the same questions, but I'm just going to cut it down to one so I can get you out of here on time. Aliens, are you a believer or a non-believer?

• 53:46Speaker 02

  I think they run the world, Tom.

• 53:51Anthony Pompliano?

  That might be the best answer I've ever got. What do you mean by that?

• 53:57Speaker 02

  Let's just leave it there, shall we? Maybe they run the world. Maybe they run the world, right?

• 54:03Anthony Pompliano?

  I love it. I love it. Where can I send people to find out more about LMAX Digital or find you on the Internet?

• 54:10Speaker 02

  Very simple. LMAXdigital.com or LMAX.com. I'm David Mercer. You'll see me everywhere. Just reach out and I look forward to us all benefiting from this great growth we're all going to experience in crypto.

• 54:27Anthony Pompliano?

  LMAX Digital, let it fly, let it fly. David, listen, thank you so much for the time. I think people are really going to enjoy this. I'll do it again in the future.

• 54:35Speaker 02

  Thank you very much. Cheers, Anthony.