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Crypto exchange FTX.US expands to take on Schwab and Robinhood

May 19, 2022, 11:14 AM UTC

Brace yourselves, Wall Street.

FTX.US is wading into yet another new market: Stocks.

Launched two years ago, the offshoot of Sam Bankman-Fried’s cryptocurrency exchange FTX started out as just another crypto exchange, one built for the U.S. market. But FTX.US wanted to be more than a crypto exchange—and it still does. So, over the past 24 months, the company has been building an empire of sorts. In 2021, it waded into derivatives with the acquisition of a company called LedgerX. Then came NFTs. And now? Stocks.

“It’s always been an aspiration to try to bring more traditional financial products to the FTX suite of applications,” FTX.US president Brett Harrison told me Wednesday, while we sat on a rooftop garden in midtown Manhattan. “We’ve been thinking about this for a long time.”

On Thursday, FTX.US started letting some customers trade shares in companies like Apple, Visa, and Coca-Cola—putting it into direct competition with the likes of Charles Schwab, Robinhood, and other brokerage giants.

Trading in stocks will only be available to a “few hundred” customers to start, Harrison says. And the company is limiting its stock offerings for now to only the bluest-chip of blue-chip names, like those included in the S&P 500 and the Nasdaq 100. A few exchange-traded funds and some fractional share trading will be available, as well. But at some point in the coming months, FTX.US plans to make stock trading available to all users.

FTX.US’s foray into the stock trading business comes, of course, as the markets are in the toilet.

Over the last six months, the S&P 500 has fallen more than 16%. But retail investors have been taking an optimistic look at the market, as of late. Data from Vanda Research released on Wednesday show that retail investor purchases in U.S. equities over the last five days have remained in line with the post-COVID historical average of $1.1 billion daily. FTX.US, which reportedly had 1.2 million registered users in January, is also entering a crowded field where startups like Public and Webull and veterans like Fidelity and Charles Schwab are already competing. And then there is Robinhood, the once high-flying brokerage that Bankman-Fried recently took a passive 7.6% stake in, making him one of the company’s largest shareholders. (When asked about the investment, Harrison says FTX has long admired Robinhood and that Bankman-Fried’s investment amounts to a good buying opportunity based on where the shares were trading at.)

But FTX.US, valued at $8 billion in January after an $400 million Series A, still sees room in it with its dual-pronged pitch of stocks and crypto. “We think that there will be enormous benefit to the consumer from being able to do this in one place,” Harrison says.

The company has been preparing for the move into equities for months now. Late in 2021, FTX.US acquired a broker/dealer license through a little-known company called RJL, which paved the way for Thursday’s announcement, Harrison says. It also comes 16 months after the heights of the meme stock phenomenon that got the attention of executives at some of the world’s biggest banks, lawmakers in Washington, D.C., and a big chunk of the public. It was a stunning moment in a stunning run-up in the financial markets (RIP), and one that put a new spotlight on the equity market’s plumbing, and, particularly, a practice called payment for order flow

Under the payment-for-order-flow model, Wall Street brokerages effectively offload the task of executing orders from their individual investor clients to mammoth trading giants like Citadel Securities, Virtu Financial, and Two Sigma Securities, while also charging the so-called wholesalers for the right to do so. It’s a decades-old system used by many, but not all, brokerages, and has become a crucial point of business for the brokerages that do use it, considering trading commission across the industry have tumbled to $0. In return, the wholesalers execute the orders at the public market’s best, or an even better, price and are able to capture a small spread on the trade in the process. 

FTX.US is steering clear of it all. The crypto-exchange-turned-stock-brokerage, rather, plans to route all of its orders through Nasdaq, commission free. In Harrison’s eyes, it is still unclear whether payment for order flow is better or worse for retail customers. But what the FTX.US president does say is clear is that “a growing segment of the retail investment class” either does not like payment for order flow or would like more transparency around it.

As a result, the company does not expect its stock brokerage business to make a profit, Harrison says. If it does see traction in the product, Harrison says the company may look to monetize it, though it’s unclear how. In the meantime, FTX.US has plenty else on its plate, as stocks are certainly not the last stop in its quest to dip its toes into everything. Harrison says the company hopes to roll out trading in futures products in 2022, as well. “We would like to be an exchange or a trading platform for all financial assets,” the FTX.US president says, “eventually.”

Declan Harty
@declanharty
Declan.harty@fortune.com

DECENTRALIZED NEWS

Credits 🚀 

Robinhood has launched a non-custodial crypto wallet

Michael Barr, President Joe Biden's pick to be the vice chair for supervision at the Federal Reserve, has investments in more than 80 fintech companies. 

S&P Global Ratings has created a new DeFi strategy group

The company formerly known as Facebook has applied for five trademarks for an "online social networking service" for crypto investors.

Bain Capital Crypto has added TuongVy, a former SEC attorney who most recently worked as deputy general counsel and compliance officer at Worldcoin, as a partner and head of regulatory and policy.

Andreessen Horowitz has launched a $600 million fund dedicated to the future of gaming. 

Debits 🐻 

Coinbase is pulling back on its plans to triple its headcount in 2022.

President Joe Biden's administration is gearing up to press Congress to get crypto exchanges to separate customers' money from their own.

Terraform Labs CEO Do Kwon wants to split a new blockchain off of the recently imploded Terra. Investors are unhappy.

Former Fed Chair Ben Bernanke says crypto has been successful, not in being a substitute for fiat money, but for being a speculative asset.

Crypto markets have continued to slide over the last week, with the global total value now sitting at $1.24 trillion—down from $1.3 trillion.

FOMO NO MO

The fall of the King of the Lunatics. Four years ago, Do Kwon and Terraform Labs set out to build what the so-called "King of the Lunatics" would go onto call his "greatest invention." It wasn't. Over the last week, crypto markets have gone into a tailspin as Terra, the algorithmic stablecoin, plunged in value, in part because of economic conditions and in part because of long-standing concerns about the crypto, chief among them was the fact that Terra was not backed by traditional assets of any form but some algorithms and hype. 

From the article:

From the beginning, crypto experts were skeptical that an algorithm would keep Mr. Kwon’s twin cryptocurrencies stable. In 2018, a white paper outlining the stablecoin proposal reached the desk of Cyrus Younessi, an analyst for the crypto investment firm Scalar Capital. Mr. Younessi sent a note to his boss, explaining that the project could enter a “death spiral” in which a crash in Luna’s price would bring the stablecoin down with it.

“I was like, ‘This is crazy,’” he said in an interview. “This obviously doesn’t work.”

As Luna caught on, the naysayers grew louder. Charles Cascarilla, a founder of Paxos, a blockchain company that offers a competing stablecoin, cast doubt on Luna’s underlying technology in an interview last year. (Mr. Kwon responded by taunting him on Twitter: “Wtf is Paxos.”) Kevin Zhou, a hedge fund manager, repeatedly predicted that the two currencies would crash.

But venture investment came pouring in anyway to fund projects built on Luna’s underlying technology, like services for people to exchange cryptocurrencies or borrow and lend TerraUSD. Investors including Arrington Capital and Coinbase Ventures shoveled in more than $200 million between 2018 and 2021, according to PitchBook, which tracks funding.

BUBBLE-O-METER

$2.149 billion

The U.S. Securities and Exchange Commission does a lot. For as much flak as the Wall Street regulator may get, it polices and crafts rules for stocks, bonds, ETFs, mutual funds, and crypto, though to a far more hazy degree. But the SEC needs some help, so the White House is looking to give the SEC an 8% bump to its operating budget in fiscal year 2022 to $2.15 billion. 

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(Some of these stories require a subscription to access. Thank you for supporting our journalism.)

IF YOU DON'T KNOW, CRYPTO

Algorithmic stablecoins. Well, you had to know this was coming, right? I thought about doing a crash course on algorithmic stablecoins like Terra's UST last week, but thought we were a little heavy on the whole algorithmic-stablecoin-crashes storylines, so here we are.

So, what is an algorithmic stablecoin? Well, as you may recall from a few weeks ago, a stablecoin is a crypto that purports to being stable. Typically this is done through a mix of financial assets, like cash or bonds. The key is, it's backed by something. Algorithmic stablecoins? Not so much. As my colleague, Marco Quiroz-Gutierrez, explained, an algorithmic stablecoin is supposed to maintain a peg to $1 through a mix of, as the name implies, algorithms. Traders are then incentivized to either create or burn tokens, for a profit, that—if all goes to plan—should keep the stablecoin stable. In the case of UST, well as we all know by now, that didn't pan out

This is the web version of The Ledger, Fortune’s weekly newsletter covering financial technology and cryptocurrency. Sign up here to receive future editions.