Europe’s biggest prop trading shop for exchange-traded products is getting into cryptocurrencies.

Netherlands-based Flow Traders N.V. is taking on the role of market-maker for exchange-traded notes based on bitcoin and ether, according to Bloomberg. It has “dramatically increased” trading of notes issued by XBT Provider, a Stockholm-based provider of exchange-traded products for cryptocurrencies, in the last few months.

Flow Traders’ enthusiasm for crypto-based exchange-traded products runs counter to an advisory issued by Dutch financial regulators, who have cautioned against investment in crypto products. “We discourage activities in cryptos both by consumers and professional license holders,” a spokeswoman for AFM told Bloomberg. She also added that due to the novelty of cryptocurrencies, they did not consider it to be an asset class.

But Dennis Dijkstra, Flow Traders co-CEO, held out hope that cryptos might be regulated “very soon”. “The market participants are much more professional than people think. Institutional investors are interested – we know they are because we get requests,” he said.

A Turn Of Events For Crypto Exchange-Traded Products?

Despite its officially antagonistic stance towards cryptocurrencies, Europe has had a far more tolerant approach to crypto ETFs as compared to the United States. Sweden’s XBT provider has been operational since 2015 and recently introduced an ether-based ETN for customers. This is in addition to the two ETNs that track the price of bitcoin if offers to customers. Bitcoin Tracker One and Bitcoin Tracker Euro are similar to Bitcoin Investment Trust’s GBTC that trades on OTC markets in the United States and are less volatile as compared to the latter.

Flow Traders attempt to make cryptocurrency markets by connecting buyers with sellers attacks a key problem in the ecosystem. Despite cornering valuable mindshare and funds in the last year or so, cryptocurrencies are yet to gain trust of investors. This is largely due to their risks associated with their trading. That list is a big one, from hacks at trading exchanges to the presence of whales, or individuals with large crypto holdings, who move markets. But things are changing. Goldman Sachs is reportedly setting up a prop trading desk for cryptocurrencies.

Flow Traders is a speed trading firm that handles a third of all ETF trades in Europe. Started in 2004, Flow Traders diversified into trading currencies last year. According to earlier profiles, it uses deterministic modeling to “eliminate as much risk as possible” in its trades. Its entry into market-making for crypto is likely to ratchet up volatility as the firm relies on a strategy of high frequency trades with low margins to pump up profits.   

Dijkstra told Bloomberg that the firm was hedging its crypto investment through purchase of futures contracts at CME and Cboe. But it has not disclosed whether it intends to hold actual cryptocurrencies as a hedge. XBT Providers, the firm whose notes Flow Traders is trading, holds physical cryptos, according to its website.

Flow’s business model relies on trading ETPs that are not so well-known or traded thinly. It uses “direct counterparties” – large institutional investors such as pension funds – who buy blocks of such ETFs over the counter. But the firm might find the going tough to find investors for crypto notes, given lack of regulation in the space. Still Dijkstra is not dissuaded. “The biggest thing is keeping the regulators on board,” he told Bloomberg.