On Thursday crypto trading firm Kraken announced that it had acquired the Small Exchange from UK broker IG Group for $100m.
The Small Exchange was originally set up in 2019 by tastytrade founder Tom Sosnoff, along with Matt Hulsizer and Jenny Just, the founders of trading firm PEAK6.
The original goal of the company was to offer smaller sized futures contracts so that they’d be more accessible to retail traders.
That doesn’t seem to have really materialised, probably because CME Group have themselves begun offering those sorts of contracts.
Consequently, it’s unlikely that Kraken will be pushing to continue having regular futures contracts on the exchange.
What could they do instead?
The Small Exchange is regulated as a Designated Contract Market (‘DCM’). What this means is that you could use it to offer futures, but you could also trade event contracts and perpetual futures on it.
The structure is also probably such that, were it to do so, Kraken could set itself up as a market maker on the exchange. This is what Interactive Brokers has done with its event contracts DCM ForecastEx.
Kraken did not actually say this is what they’ll do but there was one potential hint in the otherwise vanilla statement the firm put out (emphasis is ours).
“This step connects spot, futures and margin products inside a single regulated liquidity system, reducing fragmentation, lowering funding latency and bringing onshore the kind of access and performance that has mostly existed offshore,” said Arjun Sethi, Kraken co-CEO.
“Under CFTC oversight, Kraken can now integrate clearing, risk and matching into one environment that meets the same standards as the largest exchanges in the world.”
The reason we think that ‘offshore’ part is significant is that no one in the US has been trading small size future contracts offshore. They have been trading perpetual futures offshore. It is hard to see what else that comment alludes to.
And if the goal is to bring those products ‘onshore’, presumably that means using Small Exchange to offer perpetual futures. Let’s wait and see.
