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To take away
- High frequency trading (HFT), a long-standing and controversial practice in traditional markets, has also become commonplace in crypto.
- Physically placing trading servers near stock exchange matching engines can have a positive impact on speed. This helps HFT companies achieve significant profits in traditional markets.
- Cryptographic exchanges such as ErisX, Huobi and Gemini are trying to attract big algorithmic traders with colocation offers.
- Demand for this service is high, but its benefits are questionable due to the cryptography market structure.
A handful of cryptocurrency purses roll out the red carpet of high frequency traders.
Huobi, based in Singapore, and ErisX, in Chicago, have separately started to offer a colocation, in which the server of a customer is placed in the same site or the same cloud as that of the stock exchange, told CoinDesk the managers of each purse. This allows these investors to execute trades up to a hundred times faster, which gives them an edge over the rest of the market.
These exchanges join Gemini, one of the first cryptography companies to offer colocation in a popular New York City data center, and is about to expand the opportunity to include a second site in Chicago.
In particular, none of these exchanges makes the service pay, considering it as a means of differentiation. "This is our competitive advantage," said Andrey Grachev, director of Huobi Russia, the Moscow exchange's client office.
Admittedly, such developments remain rare in crypto, which was historically dominated by individual traders and has only recently begun to attract the interest of institutional investors such as hedge funds and family offices.
But stock market movements are a sign that high-frequency trading (HFT), a long-standing and controversial practice in traditional financial markets, is slowly entering the cryptographic realm. And although "robots" are present in the crypto since the time of the mount. Gox, colocation brings algorithmic trading to a different level.
Eric Wall, a former crypto and blockchain manager at Cinnober, a financial technology company acquired by Nasdaq, told CoinDesk:
"It's a big deal, everyone I talk to manages an exchange that would have been approached by Wall Street guys with these kinds of requests."
Most cryptographic exchanges are not ready to meet this demand, Wall said. These are "very new concepts for many retail-oriented exchanges, with no experience of the traditional world, it seems."
800K exchanges per day
In the six months since Huobi opened its office in Russia, about 50 customers have benefited from its colocation service by locating their servers in the same cloud and using the same domain name service (DNS) as the central, according to Grachev.
The option allows these customers to perform transactions 70 to 100 times faster than other users, he said. "One of our customers does about 800,000 transactions a day, and there are more and more."
Unlike many cryptographic exchanges using cloud-based servers, ErisX has a hardware matching engine, located in the Equinix data center in Secaucus, New Jersey, said Matthew Trudeau, chief strategy officer for the company. exchange.
Trudeau told CoinDesk that the same servers hosted the corresponding engines of a wide range of traditional exchanges, brokers and trading companies, so that traders with servers located in the data center could connect to the corresponding engine. of ErisX. (The company launched spot transactions on several cryptocurrencies in April and recently obtained regulatory approval of the futures contracts.)
Gemini, founded in 2014 by Cameron and Tyler Winklevoss, also hosts its main trading platform at Equinix and offers a roommate on this site. The exchange plans to soon offer another colocation option in the Equinix data center in Chicago, where several stock exchanges and their HFT customers are keeping their equipment, according to the Gemini website.
In a statement, Gemini Chief Operating Officer Jeanine Hightower-Sellitto said the exchange "offers a variety of connectivity options to meet the needs of our customers. Each option is available for free for all our customers. "
Coinbase, the main cryptographic center in the US, nearly entered the fray but closed its Chicago division this year, which was working on services for high-frequency traders, such as roommates. At the time, the stock market had cited the priority given to other institutional services.
The company declined to comment on this article. (Gemini, which has just opened an office in Chicago, has recruited some of the former employees of Coinbase.)
Controversial practice
All this raises the question of whether HFT, given its history on Wall Street, could aggravate the problems in the opaque and volatile markets of cryptography.
As described in the book of Michael Lewis Flash BoysAlgorithmic stock traders have placed their servers near physical exchanges to execute trades faster than other investors and make profits on arbitrage between markets in fractions of a second.
The problem with HFT, as Lewis explains, is that in a market where some players can trade hundreds of times faster than ordinary users, they are unfairly disadvantaged and leave ordinary traders, non-algorithmic. , with lower price options.
According to a 2011 report from the International Organization of Securities Commissions (IOSCO), another problem related to HFT is that it can significantly increase market volatility.
In particular, he contributed to the "flash crash" of May 6, 2010, when prices for many US stocks fell and rallied significantly in minutes, exposing ordinary traders to a higher risk that they could not handle. as fast.
The Federal Reserve Bank of Chicago wrote in 2012 that high-speed trading was causing other technical problems that cost businesses hundreds of millions of dollars. "Some high-speed trading companies hold stakes in certain stock exchanges."
Market maturation
However, Trudeau d'ErisX (who, it should be noted, was one of the first employees of the IEX scholarship, the heroes of Flash Boys) argued that high-frequency arbitrage and automated trading could generally benefit markets.
They help reduce the price differential between different exchanges over time and make markets more efficient, including the crypto market, said Trudeau, explaining:
"This phenomenon has occurred in other asset classes, as trading has become more electronic and more automated. Market makers and arbitrageurs can trade more efficiently, which improves price formation, price discovery and liquidity. Arbitrage opportunities may become fewer and more ephemeral, which is a sign of a more efficient and mature market. "
However, it is important to check whether stock exchanges and high frequency traders are on strike with preferential terms that are not disclosed to the market, he noted.
ErisX, for its part, "offers our customers transparent and standardized price and connectivity options. All customs have the same conditions of access and fees, "said Trudeau.
For its part, Huobi is trying to ensure that all users "compete on an equal footing," said Lester Li, head of global sales and institutional trading activities.
Li told CoinDesk:
"Our users know that we are monitoring any abusive trading activity. We also continually remind users that there will always be risks when you negotiate. This is why we strongly recommend users to negotiate within their means and be aware of the risks involved. "
Protecting the retail trade
However, other exchanges contacted by CoinDesk made it clear that they do not do something special for algo traders.
LGO Markets, which launched this year earlier this year, has taken the opposite approach, deliberately slowing the bargaining process for all, said CEO Hugo Renaudin.
Before being matched, the orders are grouped in batches and the hash of each batch is recorded in the bitcoin blockchain – each batch requires approximately 500 milliseconds to be formed, thus constituting a "slower" for trading, a said Renaudin. As a result, "each operator has the same feedback on the activity of the platform".
Taking a similar position, Kraken Vice President of Engineering, Steve Hunt, told CoinDesk that the exchange did not do things differently for HFT's customers.
"We want all customers, regardless of size or size, to have equal access to our market," Hunt said.
Binance, the largest cryptographic exchange in the world, does not plan to offer a roommate, said the account manager, Anatoly Kondyakov, at a recent meeting of "elite investors" in Moscow. He gave two reasons.
First, "we try to protect retail customers," said Kondyakov, answering a question from the public. Secondly, co-location means an official presence in a particular jurisdiction, which Binance is not willing to do at the moment. (Binance is known for its skillful regulatory arbitrage.)
Too early?
However, others said that the cryptography market has not caught up with the traditional financial world to the point where offering high frequency business roommate services would make a lot of sense.
"Currently, the structure of the crypto market is developing. HFT, in the context of equity and currency markets, does not really exist, "said Wilfred Daye, head of financial markets at OKCoin, the San Francisco-based stock exchange.
Traders coming from traditional markets for crypto actually request a roommate, but "demand is punctual, it's not a popular demand in crypto", so OKCoin does not offer this service.
David Weisberger, co-founder and CEO of the market data platform Coinroutes, has another reason to remain skeptical about HFT crypto: this market is so much more dispersed and volatile than what works with shares will not be without bitcoin.
According to Weisberger, the concept of high-frequency front-end sales does not matter, as prices vary much more between different markets than on traditional markets:
"In futures or equities, with relatively large minimum quotation changes, the bid bid gap is often stable, with many bids and bids at the same price. In this case, the fastest is at the head of the line each time the price changes. Orders at the beginning of the queue are profitable, while those at the back are not. In crypto, the size of the ticks (price variation) is so small that it is easy to be "first" by paying a slightly higher amount, without the need for an incredible speed. "
In addition, cryptographic exchanges are so scattered around the world that it is useless "to be colocated on an exchange and wait a few seconds for Binance to be updated", added Weisberger.
The reason why there is a demand for colocation in cryptographic exchanges, he concluded, is simply human nature:
"People always lead the last war. People do what they are used to. "
Image via Shutterstock
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