BlackRock's Bitcoin ETF Might Have Trading Support of Heavyweights Like Jane Street, Jump and Virtu: Source

Some of the world's largest market-making firms are in the mix to potentially provide liquidity for BlackRock's eagerly awaited bitcoin ETF if regulators approve the product, according to a person with knowledge of the matter.

Trading giants Jane Street, Virtu Financial, Jump Trading and Hudson River Trading have held talks with BlackRock about a market-making role, according to a BlackRock slide deck reviewed by the person familiar with the matter.

BlackRock, Jane Street, Virtu and Jump declined to comment. Hudson River Trading, also known as HRT, didn't respond to a request for comment.

The U.S. regulatory crackdown on crypto this year – a seeming reaction to FTX's implosion and other 2022 scandals – has persuaded some U.S. firms to curtail their activity in the space. Bloomberg reported earlier in May that Jane Street and Jump had curtailed their crypto trading amid that crackdown.

Assuming the U.S. Securities and Exchange Commission approves some or all of the dozen or so applications for bitcoin ETFs (including the one from BlackRock, the world's largest asset manager), that would open a new pathway for U.S.-based firms to get a piece of the action in crypto – in a way that plays to their conventional strengths. Being a market-maker for ETFs, which trade on exchanges just like stocks, requires a level of sophistication and automation that only a relatively few companies can achieve.

Market makers are vital to ETFs. They are responsible for creating and redeeming new shares of an ETF, a role designed to keep its price tethered to the price implied by the value of the ETF's holdings.

One of the best examples of why such a create-and-redeem structure is important actually comes from crypto. Grayscale Investments offers a product called the Grayscale Bitcoin Trust (GBTC) whose price has over the past few years wandered dramatically far away from the billions of dollars worth of bitcoin [BTC] that it owns. Unlike an ETF, shares of this trust cannot be redeemed for BTC. Grayscale (which, like CoinDesk, is owned by Digital Currency Group) has applied to convert GBTC into an ETF.

Grayscale's initial application for the conversion was rejected by the SEC, but a court in August excoriated the regulator's rationale. The SEC decided in October not to appeal that ruling, a move widely seen as boosting the odds bitcoin ETFs will become a reality in the U.S.

"Several market makers were pulling back and being quite cautious because there was some heavy cracking down on exchanges," said James Butterfill, head of research at CoinShares, a provider of crypto exchange-traded products. "But since the Grayscale ruling, we've seen a very real change in stance from the SEC."