# How do crypto OTC desks make money?

A crypto OTC desk earns the spread on principal trades, commissions on agency trades and interest on financing, less hedging, funding and running costs.

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Crypto OTC desks make money from three sources: the spread they capture when they trade as principal, the commission they charge when they arrange a trade as agent, and the interest margin on the financing they extend to clients. What is left after hedging costs, gains and losses on inventory, the cost of funding their own capital and the cost of running a regulated business is the desk's profit, and it is usually a small share of the gross figure.

An over-the-counter (OTC) desk is a firm that trades digital assets directly with its clients at a negotiated price, away from an exchange order book. This article looks at the desk as a business: each line of its income statement, what drives it, and how the lines add up over an illustrative month. It is written for the fund, treasury, family office or large holder on the other side of the quote, because knowing how a counterparty earns its living is the quickest way to understand how it will behave. It is general information, not investment, legal or tax advice, and the rules on what a desk must disclose differ from one country to the next.

Every figure in the worked month is illustrative. The rates and volumes were chosen for readable arithmetic, not taken from any firm or from a market survey.

<figure class="keyfacts">
<div class="keyfacts-grid">
<div><b>$490,000</b><span>gross revenue of the illustrative desk in one month, on $450 million of client flow</span></div>
<div><b>$25,000</b><span>pre-tax result for the same month, once trading costs and running costs are paid</span></div>
<div><b>$368.75M</b><span>monthly principal volume at which that desk breaks even</span></div>
</div>
<p class="fig-src">Illustrative month computed further down: 10 basis points on principal flow, 8 on agency flow, a financed book of $20 million.</p>
</figure>

## What are the revenue lines of a crypto OTC desk?

A crypto OTC desk has three core revenue lines, spread capture, commissions and net interest on financing, and a fourth line that can be positive or negative: the gain or loss on the inventory it carries. Larger desks add structuring margins on derivatives and fees for services around the trade, but the first four explain most of the result of a typical desk.

The mix depends on the capacity in which the desk acts. A principal desk buys from the client or sells to the client for its own account, so it earns a price difference and carries risk. An agent desk arranges a trade between two other parties and earns a fee without owning the asset. Many desks do both, trade by trade, and the mix decides how volatile their income is.

| Revenue line | How it is earned | What the desk risks to earn it |
| --- | --- | --- |
| Spread capture | The difference between the price given to the client and the price at which the desk offsets the trade | Market moves before the offset, cost of hedging |
| Commission | A stated fee, usually a percentage of the notional, on an agency trade | Little market risk; operational and conduct risk |
| Net interest on financing | The lending rate charged to clients less the desk's own cost of funds | Credit loss if a borrower fails, collateral shortfall |
| Inventory result | The change in value of positions the desk has not hedged | Full price risk on the unhedged amount |
| Structuring and service fees | Margin on forwards and options, fees for custody or reporting | Model and hedging risk on derivatives |

One point of vocabulary before going further. A basis point is one hundredth of one percent, so 10 basis points on a notional of $1,000,000 are $1,000. Desks, like the rest of wholesale finance, think of their income in basis points of the volume they trade.

## How does a desk turn a quoted spread into income?

A desk turns a quoted spread into income only when it offsets the client's trade at a better price than the one it gave the client; the quoted spread is the most it can earn, and the captured spread is what it actually keeps. The gap between the two is the story of the desk's trading day.

There are three ways to offset a trade. The first is internalisation: the desk matches a client who buys against another client who sells, on the same day or within its risk limits. When that works, the desk earns a spread from both clients and pays no fee to any outside venue. The second is an external hedge: the desk buys or sells the same asset, or a closely related instrument such as a future, on an exchange or with another dealer. That costs a trading fee and, on a large order, some slippage, the adverse price movement caused by the order itself. The third is to hold the position, which costs nothing immediately and exposes the desk to the market.

Take one illustrative trade. A client buys $10,000,000 of an asset from a principal desk, at a price 10 basis points above the reference mid. The quoted spread is worth $10,000. The desk expects selling interest from other clients, so it hedges only $4,500,000 on an outside venue, at an all-in cost of 5 basis points, or $2,250. That leaves $7,750 of margin and an open position of $5,500,000. If the market then moves 0.15% against the position before a client seller appears, the desk loses $8,250 on it, more than the margin on the whole trade. A move of 0.14% is enough to bring the trade to roughly zero.

## When does a desk charge a commission instead of a spread?

A desk charges a commission when it acts as agent: it finds or works the other side for the client, passes the price through, and adds a stated fee instead of building its margin into the price. Commission income is smaller per dollar traded than spread income, and far steadier.

Agency work takes a few common forms. The desk may match two clients and let them settle with each other. It may work a large order on venues over hours or days and report the average price obtained. Or it may operate on a riskless or matched principal basis, buying from one party only when the sale to another is already agreed; legally the desk owns the asset for a moment, economically its income behaves like a fee.

A commission is visible, so it is negotiated, and it tends to fall as ticket size and relationship volume rise. The desk accepts that because the line consumes almost no capital: no inventory to fund, no hedge to pay for, no position to explain at the end of the day. For the business, agency income pays the fixed costs in quiet months; principal income decides whether the year is good.

## How do OTC desks earn from financing and lending?

OTC desks earn from financing by lending cash or assets to clients at one rate and funding the loan at a lower one, and by granting short-term credit around trades. For a desk with a balance sheet, the net interest margin can rival trading income, and it arrives every day whether clients trade or not.

Financing shows up in several forms:

- Settlement credit: the desk delivers its leg before the client's payment arrives, or lets a client trade against an agreed limit and settle later. The charge may be an explicit rate or a wider price.
- Collateralised loans: the desk lends cash against digital assets, or lends digital assets against cash, with the collateral worth more than the loan and topped up if its value falls.
- Asset borrowing and lending: the desk borrows assets from long-term holders, who earn a fee, and lends them on to clients who need them for hedging or market making.
- Its own carry positions: where a futures price stands above the spot price, a desk can hold the asset, sell the future and earn the difference as the two converge. That is proprietary income, not client income, but it uses the same balance sheet.

The arithmetic is different in kind from spread income. A spread of 10 basis points earns $1,000 once on $1,000,000 traded. A loan of $1,000,000 lent at 9% a year and funded at 6% earns a net $2,500 every month it stays out. The desk is paid for time, and it is exposed for the same length of time: to the borrower's credit, to the quality and liquidity of the collateral, and to its own lenders, who can ask for their money back.

That is why a desk prices credit by counterparty. The margin it earns on a loan has to cover the losses it expects across all its loans, which is a provision in its accounts every month, and the rare large loss that no monthly provision fully covers.

## Why does inventory produce gains and losses for a desk?

Inventory produces gains and losses because a principal desk always holds some position it has not yet offset, and that position changes in value with the market. Over a month, the inventory result can add to the captured spread or erase a large part of it.

A desk holds inventory for good reasons. It needs assets on hand to deliver quickly to buyers, it warehouses a client's block while it finds the other side, and it leaves part of each trade unhedged when it expects opposite flow. Risk limits cap the size of the net position, per asset and in total, and the size of the limit is a business decision: a desk that hedges everything at once pays hedging costs on every dollar, while a desk that hedges nothing is running a directional fund with a client franchise attached.

The sensitivity is easy to compute. Suppose a desk carries an average net unhedged position of $6,000,000 and earns $400,000 of spread in a month.

| Net adverse move over the month | Loss on $6,000,000 | Share of the month's spread income |
| --- | --- | --- |
| 0.5% | $30,000 | 7.5% |
| 1% | $60,000 | 15% |
| 2% | $120,000 | 30% |
| 5% | $300,000 | 75% |

The same table reads the other way for a favourable move, which is why inventory results flatter a desk in a rising market if its clients are net sellers and it sits long. A well-run desk reports the two numbers apart: what it earned from client flow, and what the market gave or took on its positions. A desk whose profit comes mostly from the second line is taking a view, and its results will not repeat.

There is also a less visible inventory cost: adverse selection. A client who knows something the desk does not, such as a much larger order still to come, leaves the desk holding a position that moves against it by design. Desks price that risk into the spread they show to clients whose flow has cost them money before.

## What does hedging cost a desk?

Hedging costs a desk the fees and slippage of its offsetting trades, the cost of carrying hedges in derivatives, and the capital it must post at every venue where it hedges. Hedging cost is the main reason the captured spread is smaller than the quoted one.

The components are these. Venue fees are charged on each offsetting trade. Slippage grows with the size of the hedge relative to the depth of the market, which is exactly the cost the client avoided by coming to the desk. A hedge held in perpetual futures pays or receives a periodic funding payment, and a hedge in dated futures carries the gap between futures and spot. A hedge in a related but different instrument leaves basis risk, the chance that the two prices drift apart. Finally, every venue requires margin posted in advance, and capital spread across five venues is capital that earns nothing and is exposed to each venue's own soundness.

A desk reduces all of these by internalising. In the illustrative month below, the desk offsets 55% of its principal flow against other clients and hedges 45% outside at 5 basis points, so hedging costs 2.25 basis points across all the principal flow: close to a quarter of the 10 basis points it charges.

## What does it cost to run a crypto OTC desk?

Running a crypto OTC desk costs mostly people, then compliance and licensing, technology and market data, custody, banking, insurance and audit, and almost all of it is fixed from one month to the next. Fixed costs against variable revenue are what make volume the central question of the business.

Staff is the largest line: traders, sales coverage, operations and settlement, compliance, finance, and engineers where pricing and risk systems are built in-house. Compliance has its own cost beyond salaries: licences or registrations in each jurisdiction served, customer due diligence on every counterparty, transaction monitoring, sanctions screening tools, legal advice and regulatory reporting. Technology covers the pricing engine, connectivity to venues, the risk and booking systems and market data. Custody, banking, insurance and the annual audit complete the list.

Two costs sit between trading and operations and are easy to miss. The first is the cost of capital: the cash and assets the desk must hold as inventory, as margin at venues and as a settlement buffer are funded by borrowing or by shareholders who expect a return. The second is the fee paid to introducers who bring clients, which is a cost of the trade it relates to and reduces the margin on that client for as long as the agreement runs.

## What does a month of profit and loss look like for an OTC desk?

A month of profit and loss for an OTC desk starts with a gross revenue of a few basis points of the volume traded and ends, after trading costs and running costs, with a pre-tax result that is a small fraction of that revenue. In the illustrative month below, $490,000 of gross revenue leaves $25,000.

The assumptions are as follows. The desk trades $400,000,000 as principal with clients during the month and captures a gross spread of 10 basis points on it. It arranges $50,000,000 as agent for a commission of 8 basis points. Its financed book averages $20,000,000, lent at 9% a year and funded at 6%: $150,000 of interest received and $100,000 of interest paid in the month. It hedges 45% of the principal flow, $180,000,000, on outside venues at an all-in 5 basis points. One fifth of the principal flow, $80,000,000, came through introducers paid 1.5 basis points. Its average net unhedged position of $6,000,000 lost 0.5% over the month. It funds $15,000,000 of working capital at 6% a year. Custody, network and banking charges, the credit provision and the running costs are stated amounts.

| Line | Basis | Amount |
| --- | --- | --- |
| Spread captured on principal trades | 10 bp on $400,000,000 | $400,000 |
| Commissions on agency trades | 8 bp on $50,000,000 | $40,000 |
| Net interest on financing | $150,000 received less $100,000 paid | $50,000 |
| **Gross revenue** | | **$490,000** |
| Hedging costs | 5 bp on $180,000,000 | −$90,000 |
| Inventory result | −0.5% on $6,000,000 | −$30,000 |
| Introducer fees | 1.5 bp on $80,000,000 | −$12,000 |
| Funding of working capital | 6% a year on $15,000,000 | −$75,000 |
| Custody, network and banking charges | Stated | −$18,000 |
| Provision for credit losses | Stated | −$10,000 |
| **Net trading income** | | **$255,000** |
| Staff | Stated | −$140,000 |
| Compliance, licences and legal | Stated | −$40,000 |
| Technology and market data | Stated | −$30,000 |
| Office, audit and insurance | Stated | −$20,000 |
| **Pre-tax result** | | **$25,000** |

Trading costs take $235,000 and running costs $230,000, about 48% and 47% of gross revenue. The margin that remains is 5.1%. The single largest cost after staff is hedging, and the third is the funding of capital that never appears on a client's confirmation.

Change one assumption and the result moves by more than the profit itself: an inventory loss of 1% instead of 0.5% costs a further $30,000 and turns the month into a small loss, and an inventory gain of 0.5% would have lifted the result to $85,000.

## How sensitive is a desk's profit to its volume?

A desk's profit is highly sensitive to volume because most of its costs do not fall when clients trade less. In the illustrative desk, each change of 20% in volume moves the monthly result by $64,000, and the desk breaks even only at 92% of its baseline volume.

The split works like this. Spread and commission income, hedging costs, introducer fees and transaction charges scale with volume: at baseline they contribute a net $320,000. Financing income, the funding of working capital, the provision, the inventory result and the running costs are held constant, a net fixed charge of $295,000. The result is therefore $320,000 multiplied by the volume ratio, less $295,000, and it reaches zero at a ratio of 0.921875: $368,750,000 of principal flow with agency flow in proportion.

<figure class="fig">
<figcaption><b>Gross revenue and total costs by monthly volume</b><span>Illustrative desk, US dollars per month; principal volume shown, agency volume in proportion</span></figcaption>
<div class="fig-legend"><span><i class="k-a"></i>Total costs</span><span><i class="k-b"></i>Gross revenue</span></div>
<div class="fig-scroll">
<svg viewBox="0 0 680 280" role="img" aria-label="At $240 million of principal volume, costs are $417,000 and revenue $314,000. At $320 million, costs are $441,000 and revenue $402,000. At $400 million, costs are $465,000 and revenue $490,000. At $480 million, costs are $489,000 and revenue $578,000. At $560 million, costs are $513,000 and revenue $666,000.">
<text class="lb" x="0" y="24">$240M principal</text>
<text class="ax" x="0" y="40">60% of baseline</text>
<rect class="bar-a" x="170" y="8" width="250" height="16" rx="3"/>
<text class="ax" x="428" y="21">$417,000</text>
<rect class="bar-b" x="170" y="28" width="189" height="16" rx="3"/>
<text class="lb" x="367" y="41">$314,000</text>
<text class="lb" x="0" y="80">$320M principal</text>
<text class="ax" x="0" y="96">80% of baseline</text>
<rect class="bar-a" x="170" y="64" width="265" height="16" rx="3"/>
<text class="ax" x="443" y="77">$441,000</text>
<rect class="bar-b" x="170" y="84" width="241" height="16" rx="3"/>
<text class="lb" x="419" y="97">$402,000</text>
<text class="lb" x="0" y="136">$400M principal</text>
<text class="ax" x="0" y="152">Baseline</text>
<rect class="bar-a" x="170" y="120" width="279" height="16" rx="3"/>
<text class="ax" x="457" y="133">$465,000</text>
<rect class="bar-b" x="170" y="140" width="294" height="16" rx="3"/>
<text class="lb" x="472" y="153">$490,000</text>
<text class="lb" x="0" y="192">$480M principal</text>
<text class="ax" x="0" y="208">120% of baseline</text>
<rect class="bar-a" x="170" y="176" width="294" height="16" rx="3"/>
<text class="ax" x="472" y="189">$489,000</text>
<rect class="bar-b" x="170" y="196" width="347" height="16" rx="3"/>
<text class="lb" x="525" y="209">$578,000</text>
<text class="lb" x="0" y="248">$560M principal</text>
<text class="ax" x="0" y="264">140% of baseline</text>
<rect class="bar-a" x="170" y="232" width="308" height="16" rx="3"/>
<text class="ax" x="486" y="245">$513,000</text>
<rect class="bar-b" x="170" y="252" width="400" height="16" rx="3"/>
<text class="lb" x="578" y="265">$666,000</text>
</svg>
</div>
<p class="fig-src">Illustrative. Financing income, funding cost, provision, inventory result and running costs held constant; spread, commission, hedging, introducer fees and transaction charges scaled with volume.</p>
</figure>

The desk loses $103,000 in a month at 60% of its volume and earns $153,000 at 140%. Client volume in digital assets rises and falls with market activity, so a desk with this cost structure makes its year in its strong months.

This operating leverage explains much of what a client observes from outside: the minimum ticket sizes, the better pricing offered for committed volume, the preference for clients with regular two-way flow, and the effort desks put into financing and custody relationships that produce income between trades.

## What does the business model mean for the client's incentives?

The business model means a principal desk earns more when the client's price is further from its own offset price, an agent desk earns more when more volume trades, and a lending desk earns more when balances stay out longer. None of that is improper; each is the ordinary incentive of a dealer, a broker and a lender, and each is managed by disclosure, competition and the desk's interest in keeping the client.

The principal case deserves the most attention because the conflict is built in. On each trade, a basis point more for the desk is a basis point less for the client. What restrains the desk is that the client can ask several desks for a price, and that the franchise is worth more than any single trade: the worked month shows a business that needs repeat volume to cover its fixed costs, which is a strong reason to price a good client fairly. The desk also learns the client's direction and size when asked for a quote, and how it uses that information before the trade is agreed is a matter for its conduct policy and for the client's questions.

The agent case is milder but not empty. A fee on notional rewards completed volume, not a better price, unless the agreement measures execution against a benchmark. Where a desk can choose, trade by trade, between acting as agent and acting as principal, the client should know which applies before the trade and not after.

Regulators treat this as a matter of disclosure. The International Organization of Securities Commissions published 18 policy recommendations for crypto and digital asset markets in November 2023, and the first of the six areas they cover is conflicts of interest arising from the vertical integration of activities and functions. Among them, the recommendation on disclosure of role, capacity and trading conflicts asks that a service provider tell clients the capacity in which it acts, including whether as principal or agent, and whether it or its affiliates make markets or trade with clients as principal. These recommendations are addressed to national regulators, and how they are implemented differs by country.

<aside class="callout">
<span class="callout-label">Capacity</span>
<h4>Ask how the desk is paid on this trade</h4>
<p>Principal or agent, spread or commission or both, hedged before or after your acceptance: the answers are routine for a well-run desk, and they tell you which of its incentives applies to your order.</p>
</aside>

## Which questions reveal how a desk earns on your trade?

Six questions reveal how a desk earns on a trade: its capacity, what the price includes, when it hedges, who else is paid, what financing costs, and whether it trades for its own account in the same asset. A desk's sales contact or its terms of business should answer all of them without difficulty.

<figure class="fig">
<figcaption><b>Questions to put to a desk before a large trade</b><span>Each one maps to a line of the desk's income statement</span></figcaption>
<ol class="steps">
<li><b>In what capacity are you acting</b>Principal, agent or matched principal, on this trade and by default. The answer says whether the desk's income is a price difference or a fee.</li>
<li><b>Is the price all-in</b>Whether a commission, a network charge or a custody fee is added to the quoted price, and on which notional each is computed.</li>
<li><b>When do you hedge</b>Whether the desk trades in the market on the strength of your request before you accept, and what its policy says about using the information in a request for a quote.</li>
<li><b>Is anyone else paid on this trade</b>Whether an introducer or referring party receives a fee, on what basis, and whether the desk or the client bears it.</li>
<li><b>What does settlement credit or a loan cost</b>The rate, the collateral required, the level at which more collateral is called, and what the desk may do with collateral it holds.</li>
<li><b>Do you hold a position of your own in this asset</b>Whether a proprietary book exists alongside the client business, and how the two are separated.</li>
</ol>
</figure>

The answers do not rank desks. A principal desk that takes risk and prices it into a firm quote, an agent that works an order patiently for a fee, and a lender that finances a position are three different services, and a large trade may call for any of them. What the answers give you is the ability to read a quote for what it is: a price that has to pay for a hedge, a balance sheet, a compliance function and a team, with a thin margin left over if the month goes to plan.