The catalyst for this demand has been the sharp drop in market depth across exchanges, said Zahreddine Touag, head of trading at Paris-based market making firm Woorton. Market depth is a metric that measures liquidity by assessing how much capital would be required to move an asset in either direction, typically measured at a spread of 2%.
As regulatory crackdowns have resulted in a substantial decrease in market depth on centralized exchanges, crypto traders are turning to over-the-counter (OTC) markets to source elusive liquidity. OTC demand has been steadily on the rise since the collapse of FTX in November, with subsequent spikes being attributed to the collapse of several crypto lenders last year and more recently the SEC’s decision to sue Binance. This week it emerged that market depth on Binance.US had plunged by more than 76%, meaning traders looking to execute larger transactions will have to deal with inevitable slippage as order books remain thin.
Woorton’s Touag noted that we’ve been receiving a lot more [OTC] demand, with spreads remaining tight due to daily recurring flow from payment providers, brokers, and algorithmic traders. This trend is reminiscent of the time after Mt Gox, the largest crypto exchange at the time, got hacked and subsequently ceased operations in 2014.
As the world’s largest asset manager, BlackRock, files for a spot bitcoin ETF, OTC deals are becoming more prevalent as traders look for a secure investment vehicle for funds and trading firms to gain crypto exposure.