New Battlefield for Encrypted Exchanges: High Frequency Trading

Some cryptocurrency exchanges are "quietly" paving the red carpet for High-Frequency Trading, and many traders are eager to move.

(Star-o-daily Note: High-frequency trading refers to computerized transactions that seek profit from extremely short-lived market changes that people cannot use, such as small changes in the purchase price and the selling price difference. Or a small spread between stocks at different exchanges. The speed of such a transaction is so fast that some trading institutions have placed their "server farms" close to the exchange's computers. Place to shorten the distance traveled by the optical cable to travel at the speed of light.)

Both the Singapore-based Firecoin and the Chicago-based ErisX are beginning to offer hosting services where the customer's server and exchange services will be placed in the same facility or in the same cloud, so that traders and investors will The ability to execute trades at a faster rate, and then gain a greater competitive advantage in the trading market.

Not only that, but the Gemini exchange is now also joining the high-frequency trading service, one of the first exchanges to receive an encrypted hosting service license in New York, and will soon start branching in Chicago.

It is worth noting that so far, these cryptocurrency exchanges do not charge for high-frequency trading services, which seems to be different from the practice of the exchange. In the Huobi Russia Moscow client office, Andrey Grachev, the local head of the exchange, said with a slight pride:

“This is our competitive advantage.”

To be sure, the application of high-frequency trading in the cryptocurrency industry is still relatively small. From a historical perspective, high-frequency trading has been dominated by individual traders, but recently this trading model has begun to attract hedge funds and family funds. Investor interest.

But for exchanges, high-frequency trading has always been a controversial practice in traditional financial markets, but now it is beginning to gradually enter the cryptocurrency industry. It is undeniable that robot trading has existed since the “Mouth Gully” Mt.Gox exchange, but today's hosting has brought algorithmic trading to a completely different level.

Eric Wall is the former head of cryptocurrency and blockchain at Coinnober, which has been acquired by Nasdaq. He said:

“High-frequency trading is a big business, and every exchange operator can't escape this topic, and some cryptocurrency exchanges have revealed that Wall Street companies are in contact with them to explore the possibility of high-frequency trading.”

However, Eric Wall believes that most cryptocurrency exchanges are not yet fully prepared for high-frequency trading needs. For cryptocurrency exchanges focused on retail investors, high-frequency trading is still a very new concept. At the same time, it lacks experience.

800,000 transactions per day

According to Andrey Grachev, head of Huobi Russia, about 50 customers have used their hosting services to put their servers and Huobi servers in the same cloud since the six-month period opened by the Huobi Russia office. And use the same Domain Name Service (DNS) as the switch. As a result, customers will be trading 70 to 100 times faster than other users, Andrey Grachev said:

“We have a customer who does about 800,000 transactions a day, and such customers are getting more and more.”

Unlike most cryptocurrency exchanges that use cloud servers, ErisX has a dedicated hardware critic engine, said the firm's chief strategy officer, Matthew Trudeau, which is deployed in the Equinix data center in Secaucus, New Jersey. Similar matching engines are basically deployed in traditional exchanges, brokerage firms or trading companies, so traders who build servers in the data center can connect directly to ErisX's matching engine. (ErisX launched a number of cryptocurrency spot exchanges in April this year, and recently obtained regulatory approval for futures business)

The Gemini Exchange (Gemini) was founded in 2014. The two co-founders are CameronWinklevoss and Tyler Winklevoss brothers who also deployed their main trading platform and hosted services at Equinix. According to the official website of the Gemini exchange, the exchange plans to provide another hosting service at Equinix's Chicago data center soon and retain its hardware for multiple stock exchanges and their high-frequency trading customers.

Jeanne Hightower-Sellitto, general manager of the Gemini exchange operations, said in a statement that they will offer a variety of connectivity options to meet the needs of their customers, and that every option offered to customers is free.

However, Coinbase, the leading cryptocurrency exchange in the US, seems a bit strange in high-frequency trading services. They closed the Chicago branch this year, and the department has been working to serve high-frequency traders, including hosting. It is reported that Coinbase closed the business at that time in order to give priority to other institutional services.

Coinbase declined to comment on this, but I wonder if it was a coincidence that the "Gemini" exchange, which just opened an office in Chicago, "borrowed" some of Coinbase's former employees.

Controversial practice

You will find that many cryptocurrency exchanges seem to start exploring high-frequency trading business, but due to the disgraceful history of Wall Street, high-frequency trading in the encryption market will also bring or even exacerbate opacity and instability.

As the American contemporary reportage writer, well-known financial journalist, and the original author of "The Big Bear", Michael Lewis, in his book "Flash Boys," the algorithm stock traders placed their servers on Near the exchange, to get faster trading speeds than other investors, to be able to arbitrage in the market in less than a second.

Michael Lewis pointed out the problem of high-frequency trading. In some markets, some participants trade hundreds of times faster than ordinary users, and they gain unfair advantage, resulting in "non-algorithm traders." "You can only make choices in the lower price range.

In addition, according to a report released by the International Securities Commission (IOSCO) in 2011, another problem with high-frequency trading is that it will greatly increase market volatility. Take May 6, 2010 as an example. On that day, a large number of US stock prices fell sharply and rebounded in just a few minutes, which led to the so-called “Flash Crash”, placing ordinary traders There is a huge risk because they simply can't react as quickly as high-frequency traders, and high-frequency traders can arbitrage in such short-term fluctuations.

The Federal Reserve Bank of Chicago also pointed out in 2012 that due to technical failures caused by high-frequency trading, companies lost hundreds of millions of dollars, and some high-frequency trading companies even own equity in the exchange.

The market is becoming more and more mature

Here we have to mention one person, he is Matthew Trudeau, chief strategy officer of ErisX Exchange.

Matthew Trudeau is an early employee of the well-known stock exchange IEX and a high-frequency trading hero mentioned in the book "Flash Boys". He has always believed that high-frequency arbitrage and automated trading can benefit the market.

Matthew Trudeau believes that high-frequency traders are helping to narrow the spread between different exchanges and make the market more efficient – ​​including the encryption market, he said:

“This phenomenon has occurred in other asset classes as transactions become more electronic and automated, which in turn allows market makers and arbitrageurs to trade more efficiently, improving price formation, price discovery and liquidity, and arbitrage opportunities. It may therefore become less and less, indicating that the market is more efficient and mature."

For high-frequency trading, however, it is important that exchanges and high-frequency traders need to close deals based on market-disclosed terms and conditions. In this regard, Matthew Trudeau points out that, for example, the ErisX exchange provides customers with transparent, standardized pricing and connectivity options, all of which use the same access and expense terms.

Another exchange, Huobi, is also working to ensure that all customers compete in a fair environment, said Lester Li, head of global sales and institutional operations at the exchange:

“Huobi's users know that we will monitor any abuse of trading activity, and we will continue to remind users that there is always a risk in the transaction, which is why we strongly recommend users to trade within their acceptable range and pay attention to the various possible risks. risk."

Protecting retail investors

It is undeniable that not all exchanges allow "algorithm traders" to be compliant.

LGO Markets, a small exchange for institutional clients, was just set up early this year, and their approach is exactly the opposite of high-frequency trading – deliberately slowing everyone's trading speed. Hugo Renaudin, CEO of the exchange, said:

“Before the high frequency trading match, the order will be batched, and the hash value of each batch will be recorded in the bitcoin blockchain – each batch takes about 500 milliseconds to form, so this can be used as The “speed bump” of the trade also allows each trader to get the same feedback on the platform activity.”

Steve Hunt, vice president of engineering at Kraken Exchange, also believes that the exchange does not specifically treat high-frequency trading customers, he explained:

“We want all our customers to trade on our platform equally.”

Binance, the world's largest cryptocurrency exchange, revealed that they will not consider hosting services for the time being. Anatoly Kondyakov, the account manager of the exchange, told the participants at the "elite investor" meeting in Moscow that the currency was made. There are two main reasons for this decision:

  • First, the currency hopes to protect retail investors;
  • Second, hosting means “an official presence” in certain jurisdictions, and Coin’s current reluctance to do so.

Is the introduction of high frequency trading in the encryption market now too fast?

Some people think that the encryption market is currently far from the traditional financial industry, so it will make more sense to provide hosting services to high-frequency traders. Wilfred Daye, Head of Financial Markets at OKCoin, San Francisco Stock Exchange, said:

"At this stage, the encryption market structure is still developing. If compared with the stock and foreign exchange markets, there is no real high-frequency transaction in the cryptocurrency market. Traders entering the encryption market from the traditional market do have hosting. Demand, but this problem is basically one-off, not a ubiquitous problem, so OKcoin will not provide this service."

David Weisberger, founder and CEO of market data platform Coinroutes, is also skeptical about high-frequency trading in the encryption market. His reason is that the encryption market is decentralized and highly volatile, so that some can play on stocks. The "routine" of the effect is invalid on Bitcoin. David Weisberger believes that the concept of high-frequency trading front-end operation has little to do with cryptocurrency, and that the price difference between different cryptocurrency exchanges is much larger than the traditional securities market, he explained:

“In futures or stocks, the minimum quotes change relatively large, and bids for spreads are usually very stable. You can often offer a large number of quotes at the same price. In this case, as soon as the price changes, it will appear soon. In front of the queue, and those orders in front of those queues are profitable, subsequent orders may not be able to make too much profit. In the encryption market, the price changes are very small, so there is no need to use high frequency trading."

In addition, cryptocurrency exchanges are scattered around the world. Even if your server is merged with an exchange, it will take a few seconds for the big exchanges like Coin to complete the transaction data update.

David Weisberger believes that those who want to get high-frequency trading through hosting are driven by "humanity," and he finally said:

“The generals always take the time to think about how to beat the last one. Investors also always hope that the previous economic cycle can reappear. People are always willing to do what they are used to.”

This article comes from CoinDesk , the original author: Anna Baydakova

Odaily Planet Daily Translator | Moni

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