In addition to our order and execution management system for crypto trading, our company provides integration and custom software development services. In this article, I would like to showcase one such project – a latency arbitrage trading system.
The main concept besides latency arbitrage is straightforward. Due to some market fragmentation, different market conditions, jurisdictions, and even trading hours, the selling price for an asset (BID) on one exchange could be lower than the buy price on another (ASK). This means you can buy in one place and sell in another, pocketing the difference.
Latency arb is very similar to what market-makers do, except for the fact that they prefer to rest somewhere in the order book. In our case, the system performs as a pure taker, scooping liquidity from the top of books. As a measure of self-protection, we only used LIMIT orders with minimal resting time (so if an order was not filled, we had to cancel it).
“Simplicity on paper” comes with a price during implementation – everything should be fast. VERY FAST. Price discrepancies appear for just a moment, and you have a limited amount of time to do the following:
Receive market data
Detect arb opportunity
Shoot two orders (to BUY on one exchange and to SELL on another) at the same time
Do not forget about error handling because bad things always happen. For example, one leg gets filled, and the second – is either rejected, partially filled, or stuck in a book.
For obvious reasons, we choose XTRD OEMS for digital asset trading as a market data source and an entry point for all orders. This allows changing trading pairs and exchanges easily without adjusting any of the trading logic.
Here is a simplified application architecture.
Our end goal was to keep the number of elements as low as possible, so we came up with the following topology:
Two independent FIX sessions – one for market data, one for trading
Trading FIX session connected to BuySideOMS, a component to manage order stages
BuySideOMS acts as a hub to receive trading commands and return execution confirmations to the business logic component
Brain is more like a complex events processing (CEP) loop that decides what the next step would be based on current market conditions (received through market data FIX session) and order statuses.
To control and monitor the Brain behavior, we added a REST-based API and a user interface on top of it; the main trick here is that REST API is set aside from the central communication circle – Brain/OMS/Market Data Session/Trading Session.
During development, our team faced several challenges:
Market data processing procedures
Asset settlement and rebalancing across exchanges
XTRD market data dissemination services don’t apply any throttling or batching to outgoing data. This means a recipient must process the data at an extremely high speed to avoid the situation called “slow consumer” when messages start to pile up in outgoing buffers causing memory overuse. Our servers react simply to it – slow sessions will be terminated after some time. An approach to solve this problem is complex and might include the following:
Reduce network travel time by locating as much as possible close to our servers
Increase operation system network buffers on your side – never, never run on a default operating system settings.
Increase the buffer size on the FIX engine. Most FIX engines allow manually setting the size of a queue
Avoid mixing market data processing and business logic in the same thread unless the logic is super simple
As long as there is no centralized clearing in crypto (yes, 2022…), you have to maintain a sizable inventory on both exchanges and settle as infrequently as you can. Your main enemy here is the exchange’s trading and withdrawal fees. Withdrawal fees might include direct fees, applied by exchange, and network fees, so watch out for this. From a distance, these numbers might look small, but the profit from arb is also not that big, so you have to perform multiple successful trades. If you do not have enough inventory, you have to rebalance it, and this is the point where withdrawal commissions can erode your trading profit. If you have big books on both sides, you can enjoy the ride!
Asset transfer itself is a challenge. Initially, our client was planning to do crypto vs. fiat arbitrage. To rebalance fiat, we planned to use a solution from a company that is exceptionally aggressive on the marketing side, promoting things they do not have. This is an untrustworthy company, so to speak. Only one step away from production, we realized it had a gap. The solution – switch to stablecoins.
For crypto rebalancing, we were in a position to buy vs. build. A top candidate here was Fireblocks. It certainly has a working product, but the price(access + API) was far beyond our allowed budget. The solution – we built a simple exchange to exchange rebalance.
Now pride time (technological, not coming out) – the system was able to hit the top of the book prices on Kraken and OKCoin in most cases, even when located in Equinix NY4 data center. It was a double pride – the trading app we built was fast, and XTRD OEMS was blazing fast. During the course of development, we navigated multiple technological, jurisdictional, and organizational challenges that our team successfully resolved.
As a footnote, does latency arb still exist in crypto? Yes, it does. Can you exploit it? Possibly. But aside from latency arbitrage, many other trading ideas can be implemented on top of XTRD OEMS.
If you have any questions (OEMS itself, custom software development services, etc) – feel free to reach out, and we will do our best to assist you.
QuantInsti describes itself as a company that provides innovation and solutions to bridge the gap between finance and technology in the changing phase of the industry. It serves individuals, businesses, exchanges, data providers, brokers, and other technology providers to achieve their common goal of excelling in Quant & Algo trading. QuantInsti provides both paid and free services to the industry.
Free services include webinars, blogs, tutorials, and trading models, algorithmic trading workshops, events, and modules for exchanges and industry. One of the most interesting and useful resources provided by QuantInst for free is their quant & algo trading blog. You can find a great selection of high-quality articles that can be a great source of information on trading for beginners and experienced traders.
Hacker Noon is one of the most popular blogging platforms “built for technologists to read, write, and publish”. It is an open international community of 15,000+ contributing writers publishing stories and expertise for 3,000,000+ curious and insightful monthly readers.
Hacker Noon has a relatively small number of articles on algorithmic trading, but all of them are very professionally written – 7 of them are among Hacker Noon top stories, which means that these articles were highly rated among this huge community of IT professionals. Take a look at stories with the “algotrading” tag and see for yourself.
According to Quantpedia’s website, their mission is “to process financial academic research into a more user-friendly form to help anyone who seeks new quantitative and algorithmic trading strategy ideas”.
A new blog post for Premium users is created once a new strategy is added into Quantpedia. Members can see all of a strategy’s characteristics and use the Screener and visualization tools to compare it to other Quantpedia strategies. All new academic research papers related to already existing Quantpedia Premium strategies are also published on their blog, but those blog posts are visible only for Premium users. Occasionally, they find academic papers related to common quantitative trading strategies. Such papers are usually described on their free blog.
Quantifiable Edges is a website founded by Rob Hanna, a full-time market professional since 2001. He first began publishing his market views and research in 2003. From 2003 to 2007 his column “Rob Hanna’s Putting It All Together” could be found twice a week on TradingMarkets.com. In 2008 Rob began Quantifiable Edges.
This resource has been publishing quantitative research, systems, and trading ideas since 2008. Quantifiable Edges also provides unique courses for longer-time market timing and quant-based swing trading, but what you can get for free is a truly great selection of articles written by Rob Hanna himself.
Cesar Alvarez, the founder of Alvarez Quant Trading, spent nine years as a professional market researcher for Connors Research and TradingMarkets.com. Cesar has been at the forefront of stock market research, having developed a number of successful trading systems now used by numerous investors and fund managers in the United States and internationally.
Most of his posts are based on the research he is doing for his own personal trading. Check out his blog where he tests trading ideas that readers and Cesar have. The primary focus is on stocks and ETFs with a hold range of a couple of days to several months. You can get spreadsheets of the results and more. Worth mentioning is that he also posts results that did not work out. “Understanding what does not work is every bit as important as knowing what does” – Alvarez says.
Cryptocurrency exchanges occupy a precarious position in a unique field of technology. Despite their undisputed role as fiat-to-crypto gateways that are beneficial to many people across the world, they face endemic hacking problems and distrust by core cryptocurrency proponents. Inevitably, this draws from a balancing act between conventional finance and a disruptive market — attempting to capture as much value as possible.
But cryptocurrency exchanges aren’t going anywhere soon.
Decentralized exchanges (DEXs) continue to tarry behind in user-friendliness and liquidity, while institutions and regulators are assuredly looking for more familiar structures like centralized exchanges to service retail clients — at least compared to their decentralized counterparts.
With global regulatory regimes fragmented on their cryptocurrency positions, the onus has largely fallen on exchanges to take the initiative themselves to fix problems facing the industry. From South Korea to Japan, we are beginning to see the cooperation between exchanges necessary to convert regulators to the view that crypto markets can adequately mature. The result, hopefully, should be more standardization of practices, less market manipulation, and the facilitation of both liquidity and technological advances.
Crypto exchanges are a pivotal component of pushing mainstream cryptocurrency adoption forward. And here are 5 reasons why we need more interconnected crypto exchanges.
According to Bitwise’s report on cryptocurrency trading from earlier this year, roughly 95 percent of crypto exchange volumes are fake, expounding many criticisms of the relationship between exchanges, token issuers (i.e., ICOs and IEOs), and coin rankings sites. Many smaller, obscure exchanges directly engage in wash trading and trans-fee mining to achieve a perceived increased liquidity, which ostensibly attracts projects to list more tokens, and traders to gravitate to their platform.
Cryptocurrency markets are esoteric to the mainstream and regulators, and until exchanges take action amongst themselves, regulators are unlikely to be swayed on their legitimacy until they can prove the market is not rife with manipulation.
Non-Custodial Assets Swaps
Amongst the more promising developments concerning the underlying technology of cryptocurrencies is trust-minimized asset swaps, without intermediaries. Commonly referred to as “atomic swaps,” these transfers of tokens can take place seamlessly via standardized protocols intra-network (i.e., Cosmos) and inter-network with some advances such as submarine swaps with the Lightning Network.
For exchanges, the path towards more non-custodial asset swaps is inevitable. Decentralized exchanges offer much better security because there is no inherent third-party risk, which has repeatedly made large custodial exchanges honeypot targets for hackers.
And we are already seeing some innovation in non-custodial swaps of exchanges.
For example, Binance’s DEX is rapidly gaining traction, and from a broader perspective, it is reflective of the sentiment that centralized exchanges need to keep pace (and capture value) from the DEX market. Additionally, firms like Ernst & Young are pioneering privacy-oriented asset swaps with protocols like Nightfall, which are enticing to major financial institutions.
Minimizing custodial risk is paramount for exchanges to remain relevant as DEX’s grow in popularity, and therefore, exchanges working on standardized, non-custodial protocol swaps should help bolster innovation in the field.
More of a regulatory relationship than technical interconnection, self-regulatory initiatives for exchanges are a necessity. The lack of a transparent regulatory framework in many regions of the world is hindering the development of standardized security and other practices.
Under scrutiny from regulators, several exchanges in South Korea and Japan have proposed and worked towards self-regulatory organizations amongst themselves — cracking down on market manipulation.
Similarly, many prominent exchanges have joined CoinMarketCap’s (CMC) DATA Alliance, which was created to define stricter order book reporting guidelines, diminishing the ability of smaller exchanges to inflate their trading numbers if they want to remain listed on CMC’s rankings site. Many smaller initiatives, like the Blockchain Transparency Institute, also help to expose market manipulation via inflated order book numbers, adding pressure to exchanges.
With regulation highly fragmented currently, self-regulation among exchanges could also provide the spark that ignites regulators to make more definitive guidelines. Similarly, their purview of crypto may become more friendly as they view self-regulation as a maturity marker for the broader industry.
Facilitate DeFi & Institutional Entrance
One of the emergent trends in crypto of 2019 is DeFi, and its broader implications on the financial sector. Exchanges have significant potential to play a pivotal role in the development of DeFi, and subsequently, institutional entrance into the market.
For example, Coinbase is already offering Staking-as-a-Service to clients, and many smaller firms are originating out of a demand for DeFi services. BitMEX, the leading Bitcoin perp swap platform, is even planning on rolling out fixed income products for its users.
Should larger institutions take favorable stances on the push by exchanges to incorporate DeFi services, albeit more hybrid versions than something like MakerDAO, funds could pour into the sector. There are already numerous DeFi startups spearheading some cool technology, but institutional funding would light the sector into a full-blown hotbed of technological incubation.
Liquidity is the ultimate goal of any exchange, and interoperability among exchanges would only serve to fuel better liquidity, which begets more liquidity. Combined with standardized, non-custodial asset swaps, and the complete entrance of institutions would likely be preceded by a confluence of self-organized and interoperable exchanges.
But advantages wouldn’t be strictly relegated to institutions either.
Better liquidity across a multitude of exchanges would ensure much wider access to crypto assets by the public, including in many developed parts of the world. Bitcoin’s accessibility is currently one of its weakest assurances, largely because of the inability of many people in more oppressive political and economic arenas to gain access to the legacy cryptocurrency.
Interconnected exchanges are paramount for a swath of intercorrelated reasons. The crypto market desperately needs to mature if it wants regulators and institutions to take it more seriously. Blending self-regulation, asset swaps, reduced market manipulation, DeFi products, and better liquidity is an optimal path to reach that end.
However, many institutions continue to wait on the sidelines. Why would they do this?
It’s hard to ignore the fact that Bitcoin has been the best-performing asset class in the world for the majority of its existence. So why the hesitation from the traditional investment community?
Here are six factors affecting the appetite of institutional investors in cryptocurrency.
Anyone following cryptocurrency markets have seen the headlines about the latest exchange hack. At some point in the future, there will certainly be a bigger hack than the one the industry just experienced. What this leads to is a confidence crisis, especially amongst the uninformed. ‘This must mean all digital assets are insecure,’ they might reason.
Cybersecurity is an issue that’s not unique to the crypto asset class by any means. But it does have an extra sense of importance in the space because people have a hard time trusting something they don’t understand.
While some companies have made progress toward a solution, figuring out a way to securely hold digital assets remains a primary concern among institutional investors in cryptocurrency.
In general, volatility has an inverse relationship with security. Volatile assets are seen as high-risk while stable ones are seen as low-risk. Newer, small-cap stocks tend to be volatile while government bonds tend to be more stable, for example.
While exceptions do exist, this is one of those tried-and-true principles of investing that many people can’t seem to get out of their heads. Just because an asset is volatile doesn’t make it higher risk than less volatile assets, although as a general rule volatility is a good way to assess risk.
Fiat currencies like the Turkish Lira, Argentinian Peso, and Venezuelan Bolivar were all stable for long periods of time before entering free fall. But most big investors would still rather risk losses in an asset class they know than take a stab at an asset class they don’t.
Basic Lack of Awareness
Digital assets as a class has only existed for little more than ten years. Many have yet to see its full potential realized.
It can be difficult to comprehend the total paradigm shift that has occurred with the invention of blockchain. The implications are vast, and often overwhelming for even seasoned traders.
This explains why a handful of the biggest traditional investors in the world are hesitant to go ‘all-in’ with cryptocurrency, for now. Some big names have been very vocal with their criticisms of Bitcoin, often relating it to some of the financial mechanics that started the 2008 financial crisis. These criticisms often demonstrate a fundamental ignorance about the technology upon which cryptocurrency is predicated – distributed ledger technology, or blockchain.
Immaturity of the Industry
Let’s face it. Trusting an asset class that’s only a decade old isn’t easy. The space has been plagued by bad actors and mishaps. And the industry as a whole has a branding problem, with negative misconceptions abounding.
These misconceptions might be the least tangible of the six factors but also the most difficult to overcome. The problem is purely cognitive in nature. As more traditional financial players continue to educate themselves with regard to blockchain, however, this should change.
Some traditional financial institutions have struggled to keep up with the fast-moving blockchain industry. With the smartest talent garnering an extremely high level of competition, the barrier to entry is enormous, to say the least. Some companies even attempt to circumvent the head hunting process by attempting to train their staff to learn crypto, which hasn’t proven successful for many companies.
Most people at financial institutions probably don’t know what the term “cold storage” means, for example, and much less how to implement it. This knowledge barrier creates an inconvenience for organizations which can be intimidating, leading to further segmentation of opinions about the industry.
The majority of the world’s most important international regulators have been more than vague in their guidance toward the crypto asset class. Some say cryptocurrency is an asset in the same way that property is, others say some coins are securities, while others claim digital assets are commodities.
This is a nightmare scenario for institutional investors in cryptocurrency. It’s even a headache for small retail investors.
To be fair, regulators have begun clarifying their stance toward crypto, as the industry continues to mature and increase in adoption globally. However, due to the fast evolving nature of the industry, this factor will continue to impede adoption by legacy financial investors.
Institutional Investors in Cryptocurrency are Still Learning
What we have seen this year continues the movement towards mainstream adoption of cryptocurrency and blockchain. One day, market participants will look back on 2019 as the year it all began for institutional investors in cryptocurrency. The entrance of a few big players in the space will likely precede a gold rush to the gates.
XTRD’s commitment to bringing many of the traditional financial instruments to the world of crypto will prove instrumental in luring in many of the legacy investment institutions to this industry. XTRD’s creation of familiar products like a FIX protocol for crypto and a Single Point of Access for traders have already attracted many hawkish investors to the market. The XTRD model will bring higher liquidity, lower fees, and combine platforms, in an effort to increase returns for traders.
Factors like custody management, regulatory uncertainty, and cybersecurity are slowly becoming less and less of a concern. Through the new crypto instruments that XTRD is bringing to market, these apprehensions are becoming irrelevant. Given the pace of developments in the space, who can say how fast those obstacles might be overcome?
Unfortunately, although many cryptocurrency exchanges have designed extremely simple tools for onboarding retail customers, the services they provide for enterprise and institutional customers is often lacking.
At XTRD, we design solutions for high volume cryptocurrency traders, helping those with advanced trading needs to access global crypto markets with improved security, reduced latency, and increased efficiency.
Here, we will take a run-through of the major challenges facing advanced traders today, while looking at how some of XTRD’s upcoming products can help banks, hedge funds, and large institutional traders improve their access to crypto markets.
Since the cryptocurrency markets are notoriously volatile, and substantial price movements can occur within just seconds, it is important to employ a solution that can minimize latency in order to quickly execute orders at the desired price.
By trading through an API, traders can minimize their security risks by limiting access permissions to exchanges, while also benefiting from improved order execution speeds—something much needed for high volume traders.
However, with each exchange having a unique API, integration costs can become burdensome, which leads many institutional traders to integrate with only a select few cryptocurrency exchange platforms.
With the advent of FIX APIs, these issues have become a thing of the past, giving institutional and professional traders a standardized way to communicate with any compatible exchange. This also has the benefit of providing complete privacy to FIX API users as channels are typically private and secure, ensuring sensitive data is never exposed to commercial platforms.
XTRD’s FIX API is one such product, providing one of the world’s first standard API which can be used for order execution at all crypto exchanges, giving major institutions, hedge funds, and algorithmic traders the opportunity to easily access liquidity across different exchanges.
By using the FIX API, trading institutions of all sizes can improve the liquidity of any cryptocurrency holdings, allowing much larger orders to be executed without risking price slippage. As a result, integration costs will be significantly lower, since traders will only need to integrate the single FIX API with their existing systems to enable API trading on all supported exchange platforms.
One of the major challenges faced by advanced traders is the inefficiency of the web interface provided by most exchange platforms. With clunky, slow, and often buggy tools slowing down the rate of order execution, and potential outages causing trading clients to miss potentially profitable opportunities, there is a great need for a robust standalone trading solution.
Thankfully, several companies have designed aggregator platforms to help institutional clients maximize their exposure to multiple exchanges without compromising on features. An example of this is the forthcoming XTRD PRO, a client-side interface that was designed to provide professional traders with robust access to crypto exchanges via XTRD’s FIX API serving as the back end.
By maintaining unfettered access to all major exchange platforms, traders will be able to capitalize on more opportunities than previously possible, all from a single streamlined user interface.
Within XTRD PRO, users will be able to manage trades from all of their cryptocurrency exchange accounts from a single downloadable application. By massively improving efficiency and fill rates, XTRD PRO users benefit from faster trades and greater profits.
A Final Word on Latency
Arguably, the major issue faced by high-frequency and algorithmic traders is the delay between order submission and order execution on the receiving platform—known as latency. If high enough, this latency can severely disrupt the profitability of a trade.
Not only does low latency lead to fewer failed trades, but it also ensures that traders benefit from the best rates, considering the volatility of crypto markets. Because of this, securing extremely low latency access to cryptocurrency exchanges should give high-speed traders a significant trading advantage, allowing them to execute trades based on momentary changes in market dynamics.
To address this concern, XTRD will soon begin offering colocation services, providing latency-dependent traders a VPS solution that cuts latency from an average of 150 milliseconds (1 second contains 1000 milliseconds), down to a potential 1.5 milliseconds. Combined with XTRD’s FIX API, this can yield a significant performance increase over handling cryptocurrency trading manually with connections over the internet, which are typically slow and not secure.
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Alexander Kravets, CEO of XTRD, took part in an institutional crypto trading panel in Moscow hosted by multinational telecom provider Avelacom, an XTRD Partner – alongside representatives from CBOE, RJ O’Brien, Exante, Finam, and the Moscow Derivatives Exchange. He shared his thoughts on crypto industry general trends and market landscape. Here are some highlights.
For how long have you been on the crypto market? What are the differences between the time you started and now?
We began working with cryptocurrency about two years ago. We started with creating a few trading strategies for ourselves, but encountered a massive amount of technological and jurisdictional issues, from which we decided to build a business to solve these problems.
That was combined with a bunch of odd characters promising the dawning of a new blockchain age and you get the picture.
Half of these companies already disappeared, another quarter will be gone in the next year or two. This is actually quite healthy and is in line with business Darwinism.
At this time we see increased interest in digital assets from traditional financial companies, who are beginning to “feel out” the market. The products that are being launched are more mature, and remind us of traditional equity and FX technologies. They are also supported by larger, mainstream companies like Fidelity, ICE, and in many cases have traditional VC backing. Financial incumbents are betting on the future of blockchain and digital assets.
How did these changes impact your current activity or your plans?
We are intensively working to expand our product offering as we want to establish a market niche for XTRD. Pretty soon we’ll be working Chinese hours 9-9-6 (nine to nine, 6 days a week).
XTRD provides a range of offerings for access to various crypto exchanges via FIX API, that we have built from scratch. Our server infrastructure is located in Equinix NY4 and we work closely with Avelacom in order to provide our clients the fastest, safest, and high-quality access to various digital asset liquidity points around the world.
The reality is that this turbulent formation period will come to an end sooner or later, there will be greater regulatory clarity and more defined asset classes. Our aim is to help build this ecosystem.
For example, just two years ago no one was considering centralized clearing, and today we, along with multiple other organizations, are evangelists for this idea, lobbying exchanges to join.
Is crypto market really that specific or the borders between cryptocurrency and the traditional financial instruments are fading away after the players from the traditional financial sphere came to the market?
At this time there is a difference, and it’s substantial. The digital asset space is strongly reminiscent of the FX industry and its’ initial formation. If we are talking about crypto exchanges, these are disparate points of liquidity, floating in space, that don’t really communicate with one another. They have severe infrastructure issues, such as uptime, slow matching engines, bad support, lack of safety of funds, difficulty with fiat, etc.
However, we shouldn’t think that if traditional financial companies enter the digital asset space, they change it exactly to their spec. They also have to adapt. For example, clearing with stable coins and smart contracts will allow clearing to occur instantly and minimize credit risk, so that could potentially eliminate T+1 or longer settlement.
DLT [digital ledger technology] is excellent technology. It may not be the next Twitter killer, but it’s quite applicable in the financial space.
The idea of decentralization: does it play any kind of key role in further industry development?
This doesn’t really apply. To be honest, the concept of decentralization is very far removed from reality. It sounds great on paper and in theory, but in practice it doesn’t work.
Think about it – if everyone has to take custody of their own wallet, no one is really responsible on a larger scale. If you have problems, you’re on your own.
People may dislike banks and exchanges for a range of reasons, but the reality is that the services they provide have a separate value. They may be expensive now, but advances technology will lower those barriers. Competition will also play a role in lowering prices.
Do you expect the rise of new players that might be able to influence the landscape of the market?
Fidelity for custody, a 2.3 B asset manager.
Bakkt for retail participation via b/d model and clearing at Bakkt (if CFTC approval).
We see many companies that focus on lending like lending club/prosper model – Celcius, Blockfi, and some institutional ones like Seabury. This speaks to the fact that institutional appetite is to short crypto and also retail HOLDers who don’t want to sell betting against them, probably a losing battle.
New modern exchanges that are much stronger in terms of tech and compliance that will likely corner the market vs incumbents because they are supported by traditional financial players (Seed CX, an XTRD partner).
What can you recommend to the companies that are planning to try crypto trading?
We like to advise on a practical approach – try a bit and go from there.
The rules of the game in digital assets and FX differ and it’s better to discover those for yourself, using smaller sums.
The technological “backwardness” of this market is actually an advantage – the barrier of entry is low, you don’t need to spend lots of money on infrastructure to start in production – most data is publicly accessible and free, you can connect over Internet, even on wifi from your balcony.
In digital asset trading, you’ll spend a lot of time to solve problems that in theory should not exist – connection to exchanges, APIs, a bunch of varying and exchange specific formats and protocols. You can try to solve this in house – belive me, it’s a major headache to have to code for data and execution in a different spec for each individual exchange – or utilize the services of companies like ours.
If you are conducting latency arbitrage, you have a year, maybe two. Even now the top of book is generally quite thin. Exchanges are already beginning to function as LPs and aggregate liquidity, consolidate order books – this limits arbitrage opportunities between exchanges and since many people are doing latency arb, this is competitive. The fees are also still high, taker fees can be as much as 30 basis points per execution.
Next step is bigger exchanges consolidating liquidity and adding datacenter presences, creating traditional HFT arbitrage scenarios we see in equities and FX.
If you have a stable business in FX or equities, hold on to it, but don’t be afraid to experiment with these new asset classes!
First of all, I don’t want to start yet another holy war of what is good and bad. Everything below is my personal opinion. If, for some reason, you disagree with it — feel free to leave me a comment and I’ll be happy to continue the dialogue.
Our company, XTRD, provides unified FIX API to trade across multiple cryptocurrency exchanges. Since we started our journey, we’ve had a chance to work with many different APIs — REST-only, REST and Web Sockets, sometimes even FIX. Today I want to explain why I think that REST and Web Sockets isn’t the best choice for trading (with some exceptions).
Don’t get me wrong, we also use REST API in our products — this is one of the best possible ways to communicate with remote systems. Whoever used CORBA or SOAP will definitely understand me. Request and response sequences allow you to create many things. But at the same time, request and response have limits. Trading is more asynchronous than many people think. It’s not only about matching buyers with sellers, but it could also be order re-routing around the entire planet.
Taking into account complex processes, trading activities should be performed in an asynchronous fashion — send and switch to another operation — the counterparty will notify you once order changes its’ state. Therefore, the pure REST “request and response” model is not very useful. You either wait for a server response until success (or failure) or start polling (constantly ask for your order status in a loop). I’m confident that 80% of the load on cryptocurrency exchanges that have REST-only API is caused by this polling. No wonder why everything is so slow…
To solve this problem at least somehow, many exchanges started to offer notification mechanisms over Web Sockets. This is a big step forward. Instead of “destroying” exchanges with repeating “what is my order status” requests, we can simply sit and wait. Unfortunately, not all is sunny here. We discovered several things which can easily add more “fun” into trading systems developer’s lives:
Sometimes notifications through Web Sockets come prior to the initial REST API call being finalized. Why? REST API and Web Sockets are totally different and independent communication channels. This is similar to situation when you picked up a phone to order some food delivery, you just dialed in, took a deep breath to make an order but suddenly someone (delivery guy) knocked into your door. He probably brought what you were about to order but the cause/effect relationship is broken, which is difficult in a programmatic setting.
Many exchanges do not allow to assign own IDs to outgoing orders. For those who are not trading it might not sound like a big deal. But compare it for a moment with sending packages without a tracking number and with partially obscured recipient addresses. There is only one way to match your order with exchange’s response — wait for the REST API call to complete. So the counterparty is waiting (and blocking resources) while exchange come up with a response. What a waste of resources…
Mixology is good in bars but attempts to use different contexts simultaneously like REST and Web Sockets is bad by design. Luckily, certain exchanges are providing the ability to trade through Web Sockets as well as receive notifications. For example, you can do it on HitBTC (their API is so perfectly designed so I can’t imagine any better) or CEX.IO.
What does this have to with FIX? FIX is a protocol, created to do only several things in a most efficient way — to trade and to transmit financial data. Of course, with some portion of ingenuity, you could customize it to send things like images… It’s like a jet — it can drive and even float with some extent but its main purpose is to fly. Period.
FIX is asynchronous by design, with relatively strict semantics and workflow but it’s the same workflow for almost every financial institution. If you are capable to trade on LMAX or CME, then you can easily connect to Gemini or XTRD (XTRD is not an exchange, but a routing mechanism).
Despite the fact that the XTRD FIX API is running on top of the native and sometimes (… ok, many times) wonky exchanges APIs, we successfully solved the problems mentioned above. Lock-free algorithms, advanced multi-threading, and 12 years of experience plus some black magic — and our customers can enjoy a standard, familiar workflow.
FIX has a higher learning curve comparable to REST or Web Sockets but all depends on what your end goals are.
Twitter is a great source of information, especially if you deal with cryptocurrencies and blockchain technologies — it helps to stay up to date and have your finger on the pulse of the market not only by reading the news but also by watching the influencers.
The XTRD team has compiled a list of Twitter accounts you probably would be interested in following if you work in blockchain & crypto related fields. Of course, there are hundreds of them, but we decided to select the one hundred most popular people in crypto space, based on relevance and the number of followers.
Note: XTRD does not endorse any of these sources or endorse any of their opinions, and we encourage you to consume all publicly disseminated information with a few grains of salt.
American entrepreneur, investor, and software engineer. Serves on the board of Facebook, eBay, Hewlett Packard Enterprise, Kno, Stanford Hospital, Bump Technologies, Anki, Oculus VR, Dialpad, and TinyCo. A proponent of Bitcoin and cryptocurrency.
Computer scientist, legal scholar and cryptographer known for his research in digital contracts and digital currency. The phrase and concept of “smart contracts” was developed by this guy. Also designed Bit Gold, which many consider the precursor to Bitcoin.
Software developer best known for his involvement with Bitcoin. In 2012 founded the Bitcoin Foundation to support and nurture the development of the bitcoin currency, and by 2014 left his software development role to concentrate on his work with the Foundation.
Venture capitalist. Before she started investing, Arianna was a PM at BitGo, where she was the third employee. Prior to BitGo, she worked at Facebook in Global Marketing Solutions and at Y Combinator-backed Shoptiques, where she ran sales.
Bitcoin Core developer, known in the Bitcoin world as Luke-Jr. Founder of Eligius mining pool. He has made over 200 contributions to Bitcoin Core, and maintains the Bitcoin Improvement Proposals section on GitHub.
Software developer and cryptocurrency serial entrepreneur. Created the cryptocurrency platform BitShares, was a co-founder of the blockchain social platform Steemit, and is CTO of EOS, with the company block.one. Creator of the DPOS consensus algorithm and Graphene technology.
Blockchain technologist, independent consultant, lawyer. Founder and former COO of Monax, a company that created the first open-source permissioned blockchain client in 2014. Advocates for civil liberties, digital rights, due process rights, free markets, and sensible regulation of cryptography.
XTRD is a company founded by Wall St professionals dedicated to bringing battle-tested financial technologies and standards to cryptocurrency markets. This means higher liquidity, lower fees, and combined platforms.
The groundbreaking potential of the cryptocurrency space has been well-documented over the last couple years. The maverick-like nature of the new industry is refreshing, and its non-conforming characteristics appealing. Yet, even the most radical innovations and industries can learn from their more established, monolithic counterparts that have come before them. When it comes to crypto, one of the primary sectors it can model is one of the largest, stablest sectors on the planet: Wall Street.
Instead of reinventing the wheel, taking the best practices from the financial industry and tailoring them to this emerging space can truly take the technology to infinity, and that’s exactly what we’re determined to accomplish here at XTRD. Based on our years of experience in the financial sector, we are applying proven, battle-tested practices that Wall Street has to offer and integrating them into our suite of products designed for the crypto space. By unifying crypto exchanges with our software, big players such as hedge funds, financial institutions and algorithmic traders can finally get fully immersed in the industry, resulting in high liquidity and lower fees for end users.
On that note, here are 4 of the biggest lessons cryptocurrency can take from Wall Street.
1. Unification Means More Money
Unifying crypto exchanges won’t only be advantageous to the large institutions involved, it will also benefit all other parties across the board through lower fees, faster trades and much more. Additionally, with less market volatility, parties with much bigger pockets will begin to invest and trade throughout the space. With more money being circulated throughout the industry, the floodgates of the mainstream adoption of cryptocurrency will be opened. This will lead to unprecedented opportunities for individuals from all walks of life in the form of new business ventures, investment opportunities, startup funding and more.
2. With More Money Comes More Security
Unfortunately, good intentions don’t always equate to good behavior. With complete decentralization and a lack of oversight in crypto, corruption becomes much more likely. Whether in the form of unscrupulous attackers hacking into a user’s wallet or a company having the ability to charge exorbitant trading fees for their coin, little can be done given the low volume of buyers, sellers and key decision makers within the space. In fact, according to research conducted by the University of Singapore and the University College of London, out of 1 million smart contracts examined, 34,000 were found to have vulnerabilities, making it clear that security needs to be a priority for crypto.
As more financial institutions begin investing in crypto, these same institutions will want to protect their assets, and will more than likely go to extraordinary measures to ensure their assets are secure. This will likely equate to more scrutiny, technological advancements, and checks and balances put in place in order to maximize protection of a user’s coins.
3. Leveraging a FIX-based API
In 1992, Bob Lamoureux and Chris Morstatt developed a monumental technology that replaced the clunky, manual communication traditionally used in equity trading with electronic communication, beginning with Fidelity Investments and Salomon Brothers. This enabled seamless communication and allowed data to help make optimal trading decisions for buyers and sellers across different markets. FIX API is a proven method of connecting markets that has become the industry standard since its inception.
Yet, despite the widespread popularity of the crypto space, no FIX equivalent exists to bridge the gap. This is one of the problems we’re addressing here at XTRD. With our low latency, FIX-based API, crypto markets will finally be able to be connected in one convenient place.
4. These Problems Will Not Go Away
Ignoring the problem of saturation with no real order or organization altogether will not make the issue disappear. According to Investing.com, as of May 2018 there were over 1,600 cryptocurrencies listed on the market, and this number only grows larger with each passing month. Without a proper, all-encompassing solution to the high volume of coins, liquidity will continue to remain low as the number of buyers and sellers remains relatively small.
The solution here is simplicity. With simplicity and consistency in a market comes less volatility. In conjunction with lower volatility, adoption rates will increase as well, making it clear that the faster crypto exchanges are unified, the easier the industry will be able to soar to new heights.
The cryptocurrency industry is a lot of things: exciting, promising and innovative. Yet, one thing it certainly is not is streamlined, efficient or user-friendly. By the same token, the speculative nature of the market has made it clear it’s far from perfect. By applying a handful of the most reliable practices of Wall Street to cryptocurrency, the industry’s full potential will be able to be unlocked, and previously immeasurable opportunities for people across the globe will be made possible.