SPEAKER_00: 0:00

Hey, hey, hey, welcome to this week's episode of Blockhead's Blockcast. I'm your host, Takatoshi Shibayama. I'm also the head of APAC for Ledger. I aim to uncover the creative, intelligent, and radical minds who are shaping the crypto industry today. I'm as crypto curious as anybody that's tuning into this show. We're doing this together, guys. Let's go. Chris, you, my friend, welcome to the show.

SPEAKER_01: 0:29

Thank you, Takasan.

SPEAKER_00: 0:30

You and I are from traditional finance. You have a very interesting career as a macro trader, having worked for Citibank, Morgan Stanley and Goldman Sachs. Tell us about your crypto journey, because usually, you know, with people in the tri-fi industry, they don't just start building a business just from scratch.

SPEAKER_01: 0:47

So we started SignalPlus in 2021. Honestly, the original idea is really about being a good trader to make some good PA money to look at the market. But I happen to have the genes of doing startups. So my partner and myself, we have been working together for some other startup before SignalPlus for the past nine years. So we had the idea of that we want to run some of our own business originally, even when I was working at Goldman Morgan. I have a lot of outside business claims with the internal plus team. And then when I start to trade crypto, I look at the market. There are just so many opportunities that you can make money, especially in the option space. So I started to trade my PA there. I started to think, Hey, this market is kind of too small. And then the fact that you can make some easy money is really because this is the infant stage of the market. Is there anything we can do together? So I had been start the conversations with my partner on what we can do. And that was the very original idea of a house, you know, plus concept was born. We basically compare the crypto option markets versus the FX option market, equity option market. I used to be an FX trader. So naturally I compare a lot more with FX market and we believe the crypto option market is very, very similar to the stage of the around year 2000 FX market. So after 20 years, we saw FX market grow like 20 to 50 times. Then we started to ask ourselves, why don't crypto option grow 50 times? And then are we able to build something that can grow with the market volume? So we start to design the business model. Originally, the principle of SignalPlus is we want our business model to be a volume-based revenue model. And then we start to analyze the gap between the existing market infrastructure versus the material market, like FX market, what are we missing? So we identify like the three biggest pinpoints, which ended up to be our three products lines. Of course, we don't start it from day one on the three lines. We basically start one by one. The first products that we try to build is more like trading tools or portfolio management system that you can start to analyze your position or your portfolio in a traditional bank way view to see it. And at the same time, you will be able to understand more of your risk like all different scenarios, which is very actually essential for you to scale up of your option book. So that was a fundamental. And then the other two products is more like to bring in more market makers and to bring in more like takers. So the second that we build is a market making infrastructure that enables more market maker to electronic market making in the market in a automatic way. If we compare to FX market, there are like around 80 to a hundred market makers making FX market. But then in crypto option, the year that we'd come in, there were only maybe less than 10 electronic market makers. There are a lot of the big OTC players, but then in terms of the older book, they're just not enough. So we think because the market is too small, you cannot replicate how it operates in the bank because it takes you like six to 10 people team to manage a global book. But crypto is 724. Therefore, you will need a automation solution. Our second product is automation solution for electronic market making. And then with enough makers, then you would therefore need enough takers or the real money flows. In TriFi, this all come from the structure products. So the third product is more like an automation solution for all the existing structure product that you can see in TriFi. We have an automation version. And then we offered this solution to the big issuers like exchanges. So that was the original concept and how I decided to come into crypto industry. But then it's really thanks to the decades of experience of trying to set up some startup. Although we didn't really run something full-time, it was part-time job until Signal Plus had become a full-time job.

SPEAKER_00: 4:40

Yeah. And tell us how crypto options or even market making is done up until very recent and then how you enabled these players to a more automated fashion that you have created.

SPEAKER_01: 4:53

Taking the market making as an example, in the bank or in the traditional finance, I used to be the one sitting behind the screen doing so. So you will be able to easily stream up some price to your different systems. For example, like Citi's Velocity, Goldman's Market Traders, then you will all have the electronic prices behind the system. And that part is kind of like standard. It's quite standard in the TriFi already. But then after the trade is done, the post-trade risk management part is always managed by the trader sitting behind the screen. And because FX market is also 24 hour, so we always call this book a global book where you have traders sitting in Tokyo, Hong Kong, and then New York and London. We take turns to watch it. That was the bank setup. And with that said, if you are running a BTC option book for crypto 724, that requires you to have like five to six traders globally to take turns to watch it because people also need to take days off and the market is 724. But then the option market is just too small in terms of the volume. The option market in 2021 was only like less than 1% linear market. Linear market includes spot, perpetual futures, all of this together. But then the same number in equity is 150. The same number in FX is around 90 to 100%. That's why we believe that crypto option has 100 times to grow or maybe 50 to 80. But the bar is real because the market is so small. How would you be able to hire five to six option trader or experienced option trader to manage a small book? Assuming you have 50 million book in crypto option, which is considered a big amount of option book back in 2021. This is not enough to pay your five to six traders even. Not to mention that you have to have around like 15 to 20 people, a tech team. support the infrastructure is let's say replicating the same system in the bank you will still need around 15 to 20 tech to maintain this so that's where our products come in we try to solve the problem in a different way we basically redesign the whole mechanism of how the robot should be able to recognize the risk at the same time we design the robot to try the best to let the robot understand your risk appetite as a trader so basically you can say the trader quantify your personality of recipe type, and then try to behave as if it's a human behind the machine. So that's why people who use our infrastructure is not a strategy. It's a tool where the trader has to input all the parameters at a very early stage. And there are actually over 200 parameters. That's why the users, when they start to use us, there is always like a one to two weeks time of the training period. will give a concentrated like trainings on all the different parameters but once the users understand all the parameters they will need to input the 200 parameters then the robot will have a better understanding how this trader behave on different scenarios and then whenever the market comes the robot will be able to take care so the proof of concept of this robot is more about Let's say there is a bid offer. When you do market making the bid offer, we always call this a franchise value. Let's say the franchise value is$10. If you have a super smart human trader on the eight to 10 hour that he's on duty, he is able to monetize$8 of the franchise value after hedging. So basically you sacrifice$2, then keep$8 from the market. We will call this a very good like franchise trader. My expectation about the robot is if the robot are able to capture five to$6 out of the 10, we would call it a success because the robot can work 724 for you. You can go out drinks, you can go out for dinner, you can sleep well, and then the robot can take care of everything. So that was the original idea and what we tried to do. Apparently, because this is a trading infrastructure, we had to really test it ourselves. So we have around 20 to 25 testing robots for testing different features, testing different latency, testing functionalities. And right now we only have one second year associate managing that 20 robots but then that 20 test robots sometimes we have bugs sometimes the function is not a good function we lose money but then at the same time after more than two years already we started demo mid of 2022 a year after we founded the company until now the robot has a sharp ratio of 5.7 where we set everything to be neutral so basically the goal of the robot is to capture as much franchise value as it can and then the fact that we have only one junior managing 20 robots sitting in Hong Kong. And he go out with me for drinks all the time. So it tells you how ultimate we are that you can largely reduce your trading hack counts to start to become electronic market maker. So the bar to become an electronic market maker would be largely reduced by using our infrastructure. So that will put us in a very good market position because there are so many new exchanges want to be launching their option business and therefore they will need new market makers. For any trading firm, expanding or connecting to a new exchange means like investment for the tech team to connect up all the APIs. It's a cost and they take time. But then if SignalPlus infrastructure is there, you are a SignalPlus user, you can turn on a new exchange immediately through us. So we basically enabled Market Maker for Exchange and Exchange therefore are having incentive to pay us on this, to give us some rebates on this. At the same time, we also solve the pain point for the trading team that they don't need to develop and connect up to a new exchange by themselves. They can just use our infra. At the same time, they don't need to have their own big tech team to maintain the whole infrastructure. At the same time, they need a smaller trading team to manage this. So that's why we are solving the pinpoint for both the the market makers and the exchange. In terms of option risk automation, I think we are a little bit ahead of the curve compared to everyone else. I'm not saying that we have some technology that is a secret weapon. It's really because we have the advantage of being able to rebuild everything, leverage all the knowledge and experience that we had in the traditional finance and all the big system, like let's say Goldman system, they have the legacy issue. The system was originally built 50 years ago. And then there are so many brilliant people joining the company. They have some new ideas. Whenever they have some new ideas, they will need to patch on the existing system instead of to rewrite it. Because for any engineers, they would really refuse to touch other people's codes because there will be too many headaches to do that. Therefore, for any already existing big organizations, their existing system was like a patch, patch, patch version based on 50 years ago's infra. Right. Therefore, we have the advantage to rebuild everything. We already knew the answer. Basically, we already knew how we should build it in a better way if we got a chance to rewrite it. So we rewrite it. And thankfully, we have a new asset class, which is a crypto Then we have a new asset class, we have the opportunities, we have the knowledge and the experience. So we build everything from zero again. That's why the system can be automated enough, efficient enough to be a leader in crypto market. And hopefully next year we probably will migrate our system back to FX and equity system in term of electronic market making. If it can actually monetize the bid offer for the user and with less headcounts on the trading and less headcounts on the tech.

SPEAKER_00: 12:12

Yeah, that's really interesting because Usually for novice traders, the crypto option market is not something that people really dive into and really understand the backgrounds of all the infrastructure that is happening. And for somebody to kind of kickstart this as a business, or if you want to launch an exchange, if you want to launch a market making business, to me, it sounds like I can use your solution and then just launch it right away. So it really reduces the friction of actually launching this type of business, right? Yes. In this crypto market, I mean, you said that in 2021, it was only like 1% of the whole crypto trading market. And obviously, it has grown since then. And I'd see a lot of institutional players in this option trading market. But how have you seen it grow? What are the kind of differences that you've seen back then when you first started and until now?

SPEAKER_01: 13:07

I think the real game changer is really about the ETF approval starting from late 2023. Apparently, the option market growth has been slower than we expected, but there are a lot of tail risks that happened as well. Like post FTX, the market has been staying in a bear market for a relatively long time. The good thing is we do have enough time to build it. Why that is a game changer is for option market to grow like organically, at the end of the day, you will need some money players who are the end user or the buyers of the other option type of products and therefore more market makers will be incentivized to make a market and to chase through the option market i mentioned that in 2021 the option market versus linear is around one percent but then over the past two three years of course the linear market shrink a little bit post ftx but then it's recovering back right now the linear market but the option has been organically grow around, I would say four to five times over the past three years. It's slower than we expected, but it's still growing. And it's actually growing faster, especially last year, 2024. We start to see more and more family offices coming to ask about structural products, the yield enhancement. And it's really because after the ETF got approved, there are a lot more holders for the crypto asset. And if you are holding BTC or Ethereum, Ethereum is slightly better. You can stake it for 3% yield, but then for BTC natural holders, you don't have any yield. You will naturally to seek good yield of BTC or like a passive kind of yield. That was why last year, one of the hottest topic is about layer two BTC solutions or ecosystem to generate yield for BTC. And now there are more and more family office back down to the TriFi way of thinking. how we can generate yields through structured products. how we can generate yields through option market. So we do believe with those flows coming into the market, the option market will have more participants, both market makers and the more takers. And then we do believe the market after this more TriFi players coming in, more products coming in, next two to three years, we should actually see five to 10 times growth in option market. And therefore we want to build our infrastructure ahead of curve a little bit because all our business model is charging on the volume. So if our infrastructure is ready for that five to 10 times growth, that means that we basically will have the biggest beta on the option market grow. So that's our view on the option market. Of course, we also have a big commitment to build all this infrastructure together. Let's say for stretcher products, because we have the technology advantage on the risk automation. So we customize a little bit of the market making robots into a stretcher product robot. That makes us to be able to have probably the first robot that are able to 724 streaming exotic option based structure products. And then the robot will be able to automatically take care of the risk for the users as well. So that will largely reduce the barrier or I would say largely increase the speed of unlocking more sort of product for the industry. And therefore the next question is about the education. because we all came from TriFi space. We are very familiar with the various structure product that we can offer, but then the majority players of crypto are still more like retail users. They probably has a limited knowledge on the exotic option based structure product at the moment. So the education might take some time, but the speed has been really increased since mid of last year with all those family office rushing to allocate or deploy BTC assets.

SPEAKER_00: 16:43

And this is my own macro view, but I think we're still going to be continuing this very low interest rate environment going forward. So I think that these structured products, whether or not they'll be done through crypto or not, I think will continue to be very popular. What do you see in terms of the crypto exchanges versus traditional exchange space? So I feel like after the BTC ETFs were launched, there's going to be a lot more of these crypto products, whether it be through the ETFs, creating option markets and different types of ETFs coming out, not on different crypto assets, but on BTC, but you can have inverse ETFs and all these other varieties. How do you see crypto exchanges being able to compete with the traditional markets? And what do you think the crypto exchange advantage or disadvantage may be?

SPEAKER_01: 17:31

The way that I see it is what the market really needs is actually a central counterparty as a clearinghouse. So that will unlock the very big part of the flow that hasn't come to crypto yet, which is the Trifi money or the old money. So all the Trifi players are still only able to play on CME type of traditional space of a clearing house. So I think it's basically separate two groups of users right now. The crypto exchanges are more like facing the crypto users for now, but then for the crypto exchange to achieve the Trifi users, the bar will be high because you will need to have all the lessons, you will need to have the blessings from regulators, and you will need to have the infrastructure that is at the high performance standard of all the APIs or TriFi standard of stability. To be honest, one of the disadvantages that the crypto exchanges has over the TriFi one is really about the infra, about the API performance, about stability. There are still a lot of times when market is volatile, some of the APIs doesn't respond, or some of the infrastructure service went down. So that part, I think someone will need to redo the whole thing to provide high performance clearances. By the same time, to be able to connect up the two group of users, TriFi players versus the existing crypto users will be huge synergy for the TriFi users or will be super attractive to the TriFi users because a lot of TriFi users would tend to believe that if they are able to trade together with the crypto user, they will be able to make more money. They have more sophisticated models. So that's why right now the two groups of users are separated. I think there is one part of the job that is missing in the industry that someone has to merge it together. You provide a tri-fi standard of infrastructure. At the same time, you are able to provide the products to both groups of users to connect up the whole liquidity. So I do believe the next three, five years, the exchange market, it's a bigger play, apparently for much bigger than what we can do. But then for the industry itself, someone will need to do it to either a Trify name that unlock the crypto user to open the KYC to let them to play on the Trify platform or the other way around, a crypto exchange that unlock all the licenses and blessings from regulators to be able to clear some of the Trify assets. So we will start to see licensed exchange start to be able to getting more license and start to probably start to lease the equity and tri-fi assets within their exchanges so that basically tri-fi players can start to play all together and then that will also unlock all the cross asset hedge funds to start to play and all of those will be i would say explosively grow the crypto market once we unlock that but then it's a big project Whoever need to build that, it takes a long time and a big commitment and also have to have very good, deep understanding of the trading infrastructure, both traditional finance and the crypto side. Honestly, we wanted to build it ourselves, but then after we evaluate the project, we realized, oh, this is a too big project for us. We probably need to raise a hundred million to do that. So hopefully someone else can solve the problem for the industry so that we can all grow faster.

SPEAKER_00: 20:41

I always thought it's either the exchanges innovate quickly or get regulated in a way that they can offer For various asset classes or the development of prime brokers in this crypto space, because right now it's not a scalable level and somebody needs to come in. It might be from a crypto native firm or it could be from the Goldman Sachs of the world. I feel like that capital efficiency is still required for this market. market to grow with the track five people and now recently you had additional fundraising what do you plan to use that capital for

SPEAKER_01: 21:12

well actually fundraising is an ongoing process for the fundraising we did first quarter last year it was more like a bridge run for us to be able to expand faster this year this year i think we have done a good job about deliver what we spoke or what we told our investors starting from the foundation of the company so at day one we have three pipelines and then Right now, we have all the three pipelines making money. And last year, our revenue is around four to five times over the year before last year. And this year, January and February, our monthly revenue is already two to three times compared to the average of the fourth quarter. And to be honest, fourth quarter last year, the market is a lot more active. than first quarter this year because of the election. But then our volume has been growing, our revenue has been growing. So we are in a healthy stage that we want to move faster. We want to build our infrastructure faster since we are already leading and therefore we need to hire more people. I mean, all the three products that I mentioned earlier, honestly, splitting one of them, it will be one good startup company already because it's pretty heavy for, let's say, market making infrastructure and the structure products and infrastructure. But the company only have around 55 to 58 people full-time. So we are very short-handed. The whole team doesn't really take any days off during the past three, four years. And we want to hire probably another 20, 30 people this year. So I would say most of the fund raise down fourth quarter will be used to expand the team, to speed up our development progress. And of course we would want to spend some money on marketing as well. From the company has been founded, We actually spent around only 2% to 3% of our expense on marketing or campaigns, which is very unhealthy because for a normal company, the marketing should be around 10% or 8% to 10% of the company expense. That was mainly my fault. But then I realized, so we have been hosting some trading competition together with some good partners like Deribit. We start to realize, oh, like a$1 investment actually bring us some like$3 of revenue. So why not? So we will start to invest more in the campaigns as well, starting from this year. We are still actually fundraising this year because the revenue has been growing. And also we believe the next generation of trading infrastructure will change a lot thanks to AI coming. So at the end of the day, we have our own quantum engine or quantum lab as a bottom layer. But then we are actually building a false product line. But then that product is more like combining everything together to become a big AI agent that are able to understand different group of our users. Let's say if you are professional traders, you always hire an analyst or associate asking him or her to do some analysis or backtest. on some strategies. Let's say for the past two months time, a mean reversion strategy might be working well. Can you run some back test for me? That used to be first, second year analyst job, right? Right now with our assistant, you will be able to run it through the AI agent automatically because we have a well established database on the crypto market. We have well established modeling and pricing models within the QuantLab. And we also have automation solutions within those. So Once we train the model to be able to understand all the models, then all of this analyst job or the trading-related quant job will be done by the agent. But then let's say if you're a retail user, every day you open SignalPlus application, you will be able to see by the AI to tell you what's the most important information that you would know of apparently where the market is, what's your P&L, what has been contribute your biggest gain or loss or profit and loss. And then you would be able to say, hey, if I don't want to have such a big P&L swing in the next one week time, what should I do? And then it will be able to say, hey, since your theta is so big, why don't you consider to reduce your theta profile by doing so? And then the user can ask, hey, what's the price for this? What's the offer that I'm paying? All of this can be done through an AI methodology, but that will be the first stage. But then the second stage will be, we will have more interactions within this AI agent. The agent can be a middleman between the market participants. Let's say I have this buyer. I can ask my agent, say, hey, can you ask Takasan if he wants to buy this or not? And then the agent will be able to give you a heads up, say, hey, Chris is asking whether you are interested to do so, then if you're interested, so all of this interaction between the interbank market or all the market makers or the takers, all the interactions will be able to down by this as well. And then you will say, Hey, let's have a discussion next week about our new, like a block trading system or new like portfolio margin system next week. then the agent will be able to automatically suggest the time slot for you and me, and then to send out the block hour calendars for you and me. So all of this job should be done within the ecosystem. But again, this is more like a long-term project. That's why we will be aggressively raising more money this year to build this part. But then really for the fundraising last year, it's more like to enhance our profitability or our existing business to grow fast enough so that we can deliver the functions, the products to our existing user and new users.

SPEAKER_00: 26:30

I think there's always a time for building and then a time for selling. And I think you spend a good amount of time building and you already built three products that are, as you said, could be independent businesses of their own. You work for big banks and you kind of got into the startup space. It must be an extremely different experience, obviously. I mean, I felt it too, but I'm sure you're feeling it as well. I mean, what do you feel like is the most different experience going from a big organization to... eventually kind of running three business units on your own.

SPEAKER_01: 27:02

So when I was at big organizations, a lot of things I didn't understand, but then now, like even after I run my own business, I also like do partners with all the big organizations, like the very big exchanges. So once you see them, you will be able to feel, okay, when the organization is within 200 people, you have a small company or a small medium company type of problem. When the company has over 2000 people, you will have different problem. Apparently for the big organization is lower efficient. There will be politics. That's all the big company. problem, but then for a smaller company, the good thing is they will be super efficient. The organization will be very flat organization chart. Everyone, you know, everyone you can talk to, but as your employee or your team start to build bigger, it makes it impossible for you to know everyone to talk to everyone frequently. And therefore all the other side of the story comes. So I would say my partner and myself, we try to seek the balance in between. We want to keep our organization small, at least not that big, so that we are efficient, we can move faster. Internally, we encourage a lot, like, letting people increase efficiency using different tools so that you don't really need to pass all the same information between different teams and between different people. And therefore, sometimes the information is missing. Let's say a person says something, when it comes to D from B and C, The understanding of D versus the original message delivered by A will be very different. I think that will be very common in big organization. There's nothing wrong about that. It's really natural growth when you have 2,000 people, but we have a relatively strong preference that we try not to go to that stage so that we can keep efficient. I start to understand why sometimes the management acting in the big organization, but to me, it's really about the personality because it requires you to have different skill sets to be successful in big organizations or to run your own business. I guess I don't have that super strong skill set to be able to basically facilitate the big organizations and then be patient enough. I would rather to be able to do something, although startup life versus lifestyle back to Goldman is a lot worse than the big bank life in terms of life quality. But then I'm enjoying it. I already accepted the fact that personality It's more about your choice and your decision of what kind of life you want. Instead of startup, it's better or working at bank is better. I think both are good. It's really about individual preference.

SPEAKER_00: 29:31

Yeah, I totally agree. And I think the future of companies will be that it will be smaller. As you mentioned about AI, you probably wouldn't need that many people to run various business units. Certain functions can be replaced by AI. And I think that people need going forward is how to utilize those tools more efficiently as possible so that you can run organizations as efficiently as possible, right? So what message do you have to younger people who are coming into not just crypto, but just in startups in general? Like what kind of message do you have for them to kind of keep in mind when they make the leap from big organizations to a startup? Or whoever's trying to launch a company from the get-go.

SPEAKER_01: 30:12

Whenever I meet a junior that I think is brilliant and super smart, I always ask them one question. So I used to have a very successful trader who is also Japanese in Goldman, but then he's like super senior. So I used to ask the junior guys to say, if you can have an option that you do a swap position with him, are you willing to take it? Say you will be having this position, his wealth, and of course you will be at his age as well. And he's going to be you as an intern to start over again. What are you willing to take it? Some of them say yes, some of them say no, but then I don't know, like each intern or each juniors will have different choice, but I wouldn't know that the senior guy will say yes immediately. Why that? Because time value is huge. If you have knowledge, you feel a talent, you will have the time value. So I always say if you are option trader yourself is the underlying asset. and you can actually make the underlying asset move to your own strike to be to from out money option to become a deep in the money option so it's really dependent on your choice of how you use your time so i want the junior to be able to think a more open-minded about what kind of person they can be in the future. So, for example, when we first started Signal Plus, the robot, we failed many times at the beginning. Some of the team members even asked me, hey, Chris, do you think we should continue to do this? Because there is no such products in traditional finance market and we have been losing a lot of money already on this. Then I asked them one question. I said, OK, right now the company is losing money on this. But let me ask you something. What if there are also another 10 group of smart people like you are trying to build this. What if they also think maybe we should give up? That basically is our entry barrier. Basically I said, okay, what if we solve the problem? Then the rest of the non teams give up at this space. So whenever you think about giving up yourself, you should tell yourself there might be other people give up at the same time as well. If you want to be really outstanding, hand on there a little bit more unless it's going to kill you if it's not killing you then we can still take it so that's i think the spirit of taking the challenge for young people is the most important than the existing knowledge that you have of course is important but then knowledge you can always learn The spirit of taking challenge or the courage of taking risk in your life is the most important quality in my mind.

SPEAKER_00: 32:39

Wholeheartedly agree. I think that's extremely wise advice to young people. Thank you very much for your time. I know that you've only started to think about marketing, but if people wanted to follow you or the business, its progress, where can people go to?

SPEAKER_01: 32:53

You can either find SignalPlus on Twitter and also myself on Twitter. We are very committed to deliver the message on how we want to build the crypto the to market on how we can grow it together and of course i hope people can find me also through our podcast and thanks a lot for having me here

SPEAKER_00: 33:12

yeah thank you very much for being on the show and for everybody else i'll see you on the next episode