Jamie Dimon, CEO of JPMorgan, doesn’t think Bitcoin will exist or survive without government controls, much less give rise to an entire ecosystem of financial services. Other members of the mainstream financial community write it off as an invention of paranoid anarchists. Other observers of the space point out that the lack of regulation to prevent market manipulation will stop it from maturing to the level of mainstream financial markets. This last view is not unfounded: in lacking strong protections for participants, the cryptocurrency markets will always remain off-limits to risk-averse investors. However, even those who expect cryptofinance to remain a niche phenomenon would be best served by watching this space very closely. Cryptocurrency markets provide a play-pen of innovation simply not feasible in traditional finance.

“The market” has always brought together the bids and offers of participants. The bids and offers were ordered by price and resulted in an execution of a trade when the price the buyer was willing to pay exceeded or equaled the price a seller demanded. The first modern securities exchange as we know it was the Amsterdam Stock Exchange, established in in 1602. Yet, despite the recent increase in scale and speed of trading, the underlying structure of financial markets has remained almost entirely unchanged for their entire modern history.

Only a few minor variations on market microstructure came about when markets became electronic. One example is the pegged order type, which ties the price at which an order is going to execute to some level relative to the midpoint between the lowest seller and the highest bidder. Another example is price-size market priority: quotes at the same price level are ordered by their size rather than entry time, giving execution priority to larger market participants.

“The underlying structure of financial markets has remained almost entirely unchanged for their entire modern history.”

Pegged orders provide a way to simplify an implementation of a frequent trading pattern everyone was using anyway. Since the pattern is a participant behavior typically codified into the execution systems of participants, one would be hard-pressed to see it as an innovation at all. On the other hand, price-size markets were implemented in response to the needs of large market-makers whose ability to trade in bulk was being compromised by smaller, more agile trading shops.

We can observe that the ability to introduce sweeping innovations into this system is severely limited. The regulatory bodies tasked with ensuring continued market stability and confidence, such as the SEC or FINRA, justifiably require a lengthy and expensive process under which proposals for changes are reviewed and adopted. This involves the collaboration of an army of experts, legal professionals, and market participants. The frictions standing in the way of innovation are exacerbated by the slow technology lifecycle of a typical exchange which must ensure uninterrupted operation of consistently high-volume markets where errors can have devastating economic effects.

Consequently, only major centralized financial organizations who have access to large teams of legal and technology experts can even begin to introduce innovation. Furthermore, while these organizations may be interested in “minor tweaks” to markets, they nevertheless have a fundamental investment in the core market microstructure as it currently stands. This stems from the fact that much of trading technology is highly dependent on market structure, and so changing it would require a huge development effort at every level of existing infrastructure. In the end, low-latency computerized matching engines comprising modern exchanges encode the way the market has operated for hundreds of years.