Hey, have you ever heard of best execution trading? Well if not, you've been losing money because the crypto space hasn’t really used it to its full potential.
It's not quite a money-making strategy, more a cost-shaving strategy — something that is a regulatory duty you should have to your customer. One that the traditional finance world embraced many, many years ago. Maybe it's time for the crypto world to start maximizing our trading potential.
Let's talk about it.
What is Best Execution Trading?
Put simply, best execution trading ensures you get the best deal possible while trading cryptocurrencies.
For example, in the real world, you might use a price comparison website to find the best deal to get a product — such as Idealo. And also in traditional finance, you might use a price comparison website to find the best deal to get an asset. The same should apply when buying a token. So if I want to buy Dogecoin, what is the cheapest option? Coinbase? Kraken? A combination of the two? Etc. The same should apply when buying a token — so if I want to buy Dogecoin — what is the cheapest option? Coinbase? Kraken? A combination of the two? Etc.
Well, unfortunately, this doesn't happen in the crypto space. When purchasing at an exchange (e.g. Binance) they'll only look for the best price within their self-contained ecosystem, not the entire market.
This is mostly because of the relationship between users and crypto exchanges as well as uneven regulatory regimes across the world. In order for you to efficiently get the best price at any given time, you must manually scour every exchange.
At any given time, every exchange will have a slightly different price point for each token on the market. What that means is: that the price you see on Coinbase isn't the price you'll see on Kraken, Binance, FTX, and so on. Now, of course, exchanges don’t want to give you options — they don't want to push their users off of their platform and go somewhere that offers cheaper deals.
Thus, crypto exchanges simply give you the best deal within their own ecosystem — which may not be the best deal in the crypto market.
So, How Do You Get The Best Execution Trading in Crypto?
So, are we doomed to get bad deals for the rest of our degen life? Nope! We at Hedgehog are working tirelessly to bring best execution trading to life in the cryptocurrency world. Why? Because it’ll make everyone’s life so much easier.
And we don’t have the problems that exchanges have. We're an investment adviser so we strive to get you the best deal possible.
So, what’s in it for us? Glad you asked! Based on the size of your account, you will be charged a small percentage if you use this service — this is called a "wrap fee". Thus, using a similar model to other investment firms like Vanguard or Acorns. However, the returns you make by getting the cheapest deal on your trades will make it well worth it!
Sometimes the best execution trade can even result in a discount from the market rate, in this event Hedgehog, their clearing partner Hopscotch, and the user will share the extra money saved. However, if we can generate enough revenue by finding and splitting discounts, we’ll even waive off the wrap fee!
When Will It Launch?
The team is still working hard on bringing this feature together, making sure that everything runs smoothly before launching in the coming months.
I spoke to Hedgehog co-founder, Colton Dillion to give you an update on this feature. He said "We're hoping that it'll launch before the end of the summer. We're processing deposits and trades right now to make sure we don't accidentally lose cents and sats in the couch cushions. Once we feel really confident that everything is working as intended, we hope to be rolling this out within the next couple of months."
If you want the first one to know when it is live, make sure to subscribe to our newsletter!
Does Anyone Else Offer This in Crypto?
To our best knowledge, no, not really! Surprising and disappointing, if we're honest.
In contrast, best execution trading is commonplace in traditional finance. In fact, it's sort of a regulatory requirement.
Put simply, to adhere to regulations in the United States, you have to follow a set of rules set by the Financial Industry Regulatory Authority (FINRA). One of these rules is that you must make your best effort to find the best price for your customer.
"In practice what that looks like is Charles Schwab has an account on the NYSE, they have an account at the Nasdaq, and maybe they have an over-the-counter desk, who offers them prices." Dillion told me, "they'll check those three places, and they'll give you the best one that they're offering. The [traditional] markets are liquid because there are so many billions of dollars going through the pipes every day, that they can pretty much guarantee best execution."
In the crypto world, we don't have such a regulatory regime nor do we have that level of liquidity in the market. Because of this, best execution being a regulatory requirement might not be realistic just yet, but it could play a part in the future.
Just another reason why regulation may be good for the crypto space.
How Does Best Execution Trading Work?
If you've got this far into the article, you clearly care about best execution trading. So, let's take a deeper dive into how it works.
So, to access Best Execution Trading, you first need to sign up on Hedgehog. As investment advisers, Hedgehog has partnered up with Hopscotch which provides the backend mechanism to make best execution trading work. This is how it works:
"We say, okay Hopscotch, we need to make these trades here. And they say, okay, here are a bunch of quotes we can give you. Then, we lock in those quotes with you, the customer," Dillion said. "Then, Hedgehog places a separate trade between Hedgehog and Hopscotch. Then, finally, Hopscotch goes out and does the magic they need to do on all the different exchanges that are offering the prices that you're looking for."
Although this might sound like a lot of steps, the whole process is actually pretty quick and automated. You don’t need to sit for hours for a deal! (we know crypto needs you to be on your toes!)
Cool, so — Hedgehog and Hopscotch work together to get us a good deal but how exactly will that work? Let’s understand with an example.
Let's say you want to trade Litecoin for Nano — a trading pair that doesn't normally exist. Normally, you’ll need to buy USDT and then trade it for Nano. However, to get you the best deal, Hedgehog might not take the most direct route to make this trade.
So, instead of going from Litecoin to USDT to Nano, we may go from Litecoin to USDT to BTC to Nano because it will result in the best price for you.
So, to sum up — there is a web of possibilities that you can follow to make each trade. We do the hard work for you and go through this web with a fine comb to find the best possible route. You'll even be graced with an image that represents the spider web (or web t[h]ree) detailing the different ways you could have made the trade. Just like the one below.
Hedgehog will open an account for each client with Gemini and then use Hopscotch to maintain institutional accounts at all other exchanges, passing through customer orders to each institutional account.
"That being said, clients can currently open their own accounts and connect them manually via apikey or oauth." Dillion said, "In the future, we want to be able to open accounts on clients' behalf anywhere, but that won't be released any time this year.
It is also worth noting that Hedgehog will only offer this process for Gemini-supported assets. See a detailed list here.
Can't I Just Do Best Execution Trading Myself?
Theoretically, you could window shop at the 100s of crypto exchanges. But as you can imagine it’ll be way more effort AND require you to have more capital.
Why? Because in order for you to interact with multiple exchanges within one trade, you will need to have a little bit of cash on each exchange to make each trade.
"If you wanted to make sure that you always could execute a Bitcoin trade at Binance, or execute a little Bitcoin at FTX, you'd have to maintain a small account at each of those in the size that you want to make that trade." Dillion said, "some of the secret sauce, some of the magic of what we do is making sure that there's always just the right amount of currency in the amounts that our clients want to trade at all of the venues so that you can make sure that you're getting the best prices."
So yes — you could do this yourself but you'd need to manually search each exchange yourself while maintaining a decent level of cash on each exchange. Sounds like too much effort to me.
Why Does Hedgehog Want To Offer Me Deals?
Embarking on a journey of bringing better prices to the crypto world is a fairly noble journey to set out on. But why bother? This is far more complex and stressful than making a shitcoin to pump and dump.
When the founders of Hedgehog first joined the crypto scene, it was, frankly, a mess. You'd have to figure out what was a scam and what was legitimate. Decide between a soft wallet, hardware wallet, or paper wallet. What is a public key and what is a private key?
We've all experienced this hurdle during our first crypto journey — months of confusion, and Googling "what does X mean". For some, it becomes too much and then, they just give up.
"Once we got to actually trying to maintain a portfolio [it was still hard]. Trying to track all the prices of when you purchased versus when you sold and then, compute taxes on it — all of it was a complete mess." Dillion told me, "We really wanted to try and simplify that for everybody because we believe that cryptocurrency is here to stay and that it will change the way that we interact with the internet and the way that we interact with services."
Dillion sees a future where blockchain technology is at the center of how the world works — a true advocate for mass adoption. For this to happen (and even once it happens) things need to be smooth, simple, and cheap.
Hedgehog's best execution trading tool ticks all three of these boxes. Sign up with Hedgehog today and let’s get you started on your trading journey with your best foot forward!
Check out writer Ryan S. Gladwin's website, follow him on Twitter, and of course, subscribe to the weekly Hedgehog newsletter!