How to choose the right institutional trading platform (2024)

What is a trading platform?

There are many factors that contribute to the success of a hedge fund. Chief among them is finding the right trading platform to suit the fund’s size, budget, investment strategy and the assets they plan on investing in. Now, choosing the right platform isn’t a decision to be taken lightly, because it can have a big impact on a fund’s success.

Firstly – what exactly is a trading platform?

In essence, a trading platform is a software tool that traders use to open, close and manage their market positions, usually through a financial intermediary. For hedge funds, trading platforms are usually offered by their prime broker.

Why do hedge fund managers need to choose their trading platforms carefully?

As a trading platform is essentially the technology propping up the fund’s infrastructure, it sits at and supports the very core of a hedge fund’s operations, which is why ensuring you have the appropriate setup to begin trading is one of the most fundamental steps in building a fund’s foundations.

In most cases, prime brokers will offer trading platforms for free, or at a discount, provided the hedge fund ensures its account’s funds don’t fall below a minimum threshold and/or they make a certain number of trades per month. However, some trading platforms may not impose these types of restrictions, so it’s important for investors to check the small print to make sure the platform meets their requirements.

Whether a hedge fund manager is most interested in trading in traditional assets such as stocks, indices, futures and commodities, or trading directly in cryptocurrencies such as Bitcoin and Ethereum, finding the right trading platform is equally important.

In a rapidly expanding market, finding the right cryptocurrency trading platforms can be challenging

As cryptocurrencies continue to grow in popularity, with both individual and institutional investors alike, the market for cryptocurrency trading platforms has also boomed.As such, it’s becoming increasingly difficult for discerning investors to find the best platform to suit their needs.

A trading platform could be something as simple as a smartphone app that enables users to buy and sell assets, or it could be a much more sophisticated piece of software aimed at investment firms such as hedge funds.

As the needs of investment firms are greater and more complex than those of most individual traders, so too are their budgets and investment strategies, which is why they need considerably more sophisticated platforms to trade with. These professional platforms come with advanced features that give investors more of an edge when dealing with the markets.

The same rule applies to cryptocurrency trading platforms, there are basic apps that enable investors to buy, sell and manage assets but there are also more sophisticated platforms for professional and institutional crypto investors.

There are other considerations that crypto investors should take into account, however. The sector is known for being ‘jargon-heavy’ which means anyone new to this field must familiarise themselves with the terminology first. Next, it is important for investors to educate themselves on cryptocurrency exchanges, suitable investment strategies and the crypto market overall, as well as undertake rigorous research into finding the best crypto trading platforms to ensure they have every possible advantage.

Considerations when assessing traditional & crypto trading platforms

Every trading platform on the market will come with its own range of pros and cons. For example, some that offer competitively-low fees may offer less functionality than expensive platforms.

On the other hand, sophisticated platforms are often bundled with additional features like charting tools, real-time quotes, news feeds and premium research. Moreover, advanced platforms can be tailored to specific markets, such as stocks, currencies, options, futures and crypto.

Below, we discuss some of the key considerations to take into account when looking for a new trading platform, with additional factors for fund managers looking for a platform specifically for investing in crypto.

What is the fund’s strategy?

In many cases, the overall investment strategy of a hedge fund is likely to hold sway over the trading platform they choose. For example, a hedge fund looking to profit from the minor price changes of an asset, a strategy often referred to as scalping, is likely to be drawn to more affordable platforms as they will have less need for the additional functionality of more sophisticated technology.

What services and support are available?

Technology alone is unlikely to be enough when it comes to the day-to-day running of a hedge fund, which is why it’s just as important to select a service that offers plenty of support to its users. The first thing that hedge funds should consider when it comes to support is to what extent the provider will assist with the implementation of the software, how long this takes and whether platform training is included as part of the offering. It’s also vital to know the kind of support that’s available when the platform is up and running, so if anything does go wrong, the fund manager knows who to contact.

What is the reputation of this platform?

It’s important that hedge funds consider the years of experience their prospective platform has in providing the technology that will essentially prop up their infrastructure. This is likely to be a key consideration among investors, especially institutional clients, and potential partners that the fund may approach as it grows.

As cryptocurrencies are still relatively new, there are only a few platforms that have managed to establish themselves as reputable names in the market. While this may be a priority for some investors, others may want to consider emerging platforms as they may be able to offer something that reputable brands cannot, including more competitive fees. That said, it’s worth noting that some crypto platforms have been known to fall in recent years, and in many cases, have taken their clients’ funds with them.

Although this is less likely to happen now — as there is generally more financial protection in place to shield crypto investors — it should emphasise the importance of committing to rigorous research before committing to a provider – especially before making any large deposits.

What type of protection and security does the platform have?

The number one concern of any investor should be to ensure that their funds are secure and protected if anything were to happen to their trading platform. Unlikely as this may be, the risk of not having such protection could be severe. Moreover, your chosen trading platform should provide plenty of user security, such as two-factor authentication (2FA) to protect your account from being hacked.

What are the transaction costs?

The cost for a trading platform can vary greatly depending on the needs of the investor. For example, many trading platforms aimed at individual traders are completely free, but their capabilities won’t be anywhere near as advanced as those catering to the needs of hedge funds.

Of course, reducing unnecessary costs is important — especially for new hedge funds — but fund managers should also consider the tools, access and functionality they will likely need as the fund grows. Otherwise, managers may risk spending more money on their trading platform in the long term and inadvertently hinder the fund’s potential to succeed.

For cryptocurrency transactions, the fees attached should be accounted for when putting together an investment strategy, otherwise, investors may risk spending a large amount of their profit on the trading platform itself.

For cryptocurrency platforms

As virtual currencies can be particularly volatile, there are several factors that investors should take into consideration when looking for the best cryptocurrency trading platforms.

Diverse asset availability

As of January 2021, there were reportedly more than 6,000 different cryptocurrencies on the market according to Bloomberg. While the likes of Bitcoin and Ethereum have become incredibly popular among financial backers and investors in recent years, the vast majority have little to no trading volume or following.

Many of the lesser-known cryptocurrencies — often referred to as ‘altcoin’ — are exclusively peer to peer, which means they’re not listed on the majority of exchanges or trading platforms. In fact, most exchanges will only offer a relatively small number of cryptocurrencies, which is why it’s also important to research which currency you’d most like to invest in before picking a specific platform.

Volume and liquidity

As cryptocurrencies can be particularly volatile, it’s important to find a trading platform with high trading volumes and assured liquidity. In doing so, investors can rest assured their trades will be executed without delay. Without sufficient levels of liquidity, there’s a greater risk that investors could lose capital since the price of an asset fluctuates while the trade order is waiting to be executed.

In summary, whether you’re a fund manager with an interest in traditional assets or cryptocurrencies, there are several factors that you should consider before committing to any type of trading platform. The needs of a hedge fund can vary greatly depending on the tools and resources that it may need and in most cases, this will come down to the type of asset and investment strategy that a fund decides to take.

As the market for cryptocurrency is still evolving – despite being valued at over $3 trillion by November 2021 - preference for one platform over another may simply come down to those with the most experience and best reputation. While this may be the safest option, there may well be some emerging platforms better suited for other investors, provided the platform in question can guarantee the safety of the investor’s capital.