Fundamental Interactions Launches Auto-Hedging Tool for New Exchanges

Enterprise technology platform developer Fundamental Interactions (FI) is releasing a solution aimed at providing a jump-start in liquidity at new exchanges, particularly for token trading. 

Dubbed the ‘auto-hedger,’ the platform is targeted at start-up exchanges, over-the-counter desks, and automated market-makers operating in cryptocurrencies, security tokens and traditional asset classes, says Julian Jacobson, president and COO at FI. 

The solution will be used by VL Financial, a private blockchain-enabled platform operated by Velocity Ledger Technology, which enables the generation of tokenized assets, secondary trading and settlement. Based in Bermuda, VL Financial is in the process of attaining a digital asset license. 

Jacobson says automated hedging has been popular in mature asset classes in institutional markets, and is gaining momentum in cryptocurrency trading due to the number of venues proliferating globally that trade in common instruments such as bitcoin and ethereum. 

“[The auto-hedger] allows a market operator to kick-start the order book for a new market by tapping into an instrument that is already actively traded at some other venue. It allows a market-maker to arbitrage in instruments that are traded on more than one venue,” he says, adding that this is done by re-factoring quote feeds from an active external exchange to supply continuous order liquidity to the internal market book. 

“[Auto-hedging] will be vital in the security token market, where instruments are inherently global in nature and require tools to build regional liquidity on central limit order books,” he says. 

FI’s technology has been deployed by securities exchanges, alternative trading systems and inter-dealer brokers across various asset classes and geographies. Jacobson says the auto-hedger is active in foreign exchange, equities, and now cryptocurrencies. 

The company’s automated liquidity sourcing and hedging infrastructure to support optimal issue, trade and settle functionalities will be available as a plug-in to its existing Neutron suite of products.

Jacobson says the auto-hedger uses proprietary mechanics to minimize slippage and boost profitability at target venues. “This includes dynamic delays and fee-aware mechanics based on maker/taker pricing dynamics at the target venues,” he says. 

The service has two legs: auto-quoting and auto-hedging. The auto-quoting process converts bid-ask quotes from external exchange market data feeds into orders to create liquidity, while the auto-hedger optimally liquidates positions resulting from the auto-quoting process. 

The auto-hedger runs on the core FI stack, a mature Java-based platform that has been operational for more than eight years in the context of exchange, smart routing and automated market-making, says Jacobson. 

“In order to make the platform work in the digital asset space, FI built a wrapper around its binary API to make it broadly compatible with the websockets and APIs that are pervasive on crypto exchanges,” he says.

The product has been fine-tuned to the order book dynamics and pricing models specific to crypto exchanges. It enables integration for market data and order routing with dozens of crypto trading venues globally.