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bbullero


Total Posts: 4
Joined: Jul 2021
 
Posted: 2021-07-19 17:22
I don't understand why BitMEX trades like it trades. Maybe the order flow does not make sense. Maybe it does? Maybe I am completely clueless.

Maybe someone here could explain it to me?

Thanks


Its Grisha


Total Posts: 92
Joined: Nov 2019
 
Posted: 2021-07-19 21:34
I think you're going to have to be a little more specific than that.

But things on mex are kind of weird because of the massive taker fee and rebate relative to a pretty thin tick. On a 30k btc, rebate is 15 ticks with a 35 ticks taker fee. So order book behavior reflects this.

"Nothing is more dangerous to the adventurous spirit within a man than a secure future."

bbullero


Total Posts: 4
Joined: Jul 2021
 
Posted: 2021-07-20 06:31
@Its Grisha, it is exactly the behavior of the book and the order flow make me wonder if I have missed something important.

As an example, let us consider the XBTUSD perpetual swap. It has 50 cent tick size and trades like a "large tick stock" i.e. one tick wide 99.99% of the time. Movements in the price are driven by the top of the book queue imbalance. What I find little bit strange is the fact that once the bid or the ask depletes, the following price movement is often quite dramatic ~20-40 ticks.

Moving to the order flow. As per usual, the marketable flow is driven by the queue imbalance. This is normal. What is peculiar, however, is the fact that when the book is balanced it is like the natural flow vanishes. Then when the imbalance starts to build up the flow comes in and nukes the price up or down. The flow is very aggressive and seems to be very informed.

What I am failing to understand is who creates that flow. I am able to find 3 reasonable motives but I'd like to hear different opinions before I introduce correlation between ideas.


edit:

Its Grisha


Total Posts: 92
Joined: Nov 2019
 
Posted: 2021-07-20 19:49
I think a lot of this can be explained by the fee structure i mentioned, 7.5 bps taker fee, 2.5 bps rebate.

> It has 50 cent tick size and trades like a "large tick stock" i.e. one tick wide 99.99% of the time.

As a market maker, with the large rebate you can be wrong by 15 ticks before you stop competing on price priority. So despite the relatively thin tick, this trades 1 tick wide because quoting at the 1 tick touch is profitable as long as fair value is less than 2.5 bps lower than your bid.

> What I find little bit strange is the fact that once the bid or the ask depletes, the following price movement is often quite dramatic ~20-40 ticks.

Again, fee structure. The massive taker fee of 7.5 bps is 45 ticks which basically lines up with your numbers. As a taker, to remove liquidity from the book you need to be right by at least 45 ticks to make money.

So for example, price on other exchanges goes up. Market makers start by creating a very large imbalance on the bid, but it is not worth taking liquidity yet. Then once the "arb" finally exceeds 7.5 bps, there is a market order race. This is the "informed flow" that blasts the price by 40 ticks at a time.


"Nothing is more dangerous to the adventurous spirit within a man than a secure future."

bbullero


Total Posts: 4
Joined: Jul 2021
 
Posted: 2021-07-20 20:38
@Its Grisha, makes perfect sense.

I already went to the deep end and was thinking that maybe they fake the marketable flow to keep the price at par with other exchanges with more natural flow.

thanks

Bytes32


Total Posts: 6
Joined: Aug 2021
 
Posted: 2021-08-05 22:29
>So for example, price on other exchanges goes up. Market makers start by creating a very large imbalance on the bid, but it is not worth taking liquidity yet. Then once the "arb" finally exceeds 7.5 bps, there is a market order race. This is the "informed flow" that blasts the price by 40 ticks at a time.

Actually this doesn't make sense. Say Binance best bid is exactly 7.5 bps higher than Bitmex best ask. It makes sense to do a taker buy on Bitmex that eats through 1 tick and then do a taker sell on Binance (assuming we have zero fees on Binance). You make the 7.5 bps spread. But now Binance best bid is at 7.5 bps MINUS 1 tick higher than Bitmex - So it's no longer profitable to eat up any more of the asks on Bitmex.

I can't think of any solid reason to counter as to why the behaviour @bbullero is describing happens but I think it might be the following;

MM's quote at difference between Binance of greater than 2.5 bps because they have managed to secure queue priority advantage in an older spread at a point in time where there was no difference between Binance/Bitmex. This is the reason why the best ask/bid is 7.5 bps out and why it stays there.

Once it gets beyond 7.5 bps there is now an arbitrage opportunity for takers. They buy up the best ask and eat up all MM orders there. Now that the entire queue at the best ask tick has been depleted MM's no longer have their advantage to lean on their queue priority or scratching of later orders so the next place they quote is at the Binance ask. This leaves a 7.5 bps liquidity gap which only takes a few $thousand to buy through which is the reason it shoots up - Massive order flow imbalance on the MM side but any buys within the 7.5 bps difference certainly aren't arb opportunists because there is no arb there. It's just order flow imbalance due to the MM's pulling their asks and repricing them at the Binance best ask.

Maybe someone with more HFT experience could explain what's going on...

Its Grisha


Total Posts: 92
Joined: Nov 2019
 
Posted: 2021-08-06 00:23
>> You make the 7.5 bps spread. But now Binance best bid is at 7.5 bps MINUS 1 tick higher than Bitmex - So it's no longer profitable to eat up any more of the asks on Bitmex.

It doesn't matter if it's no longer profitable. How do you think an arbitrageur operates? I just got filled on the other leg on Binance. I have to keep deltas neutral.

Even if I lose the race I still need to send my marketable limit order. The losers of the race pay an unprofitable price in exchange for keeping their deltas neutral, which moves the price more ticks than what would otherwise be a profitable spread.

"Nothing is more dangerous to the adventurous spirit within a man than a secure future."

bbullero


Total Posts: 4
Joined: Jul 2021
 
Posted: 2021-08-10 17:33
I don't think there is arb between Binance and BitMEX.

Let's make this little bit more rigorous:

b = Binance bid
a = Binance ask

Let us make the assumption that Binance is "fair value" and that BitMEX is priced against Binance. So theoretically, BitMEX bid and ask should be b and a, respectively. This makes sense since Binance futures seem to be way more liquid than BitMEX, for whatever reason.

Now, let us suppose that we observe some arb event: BitMEX is trading at a X dollar discount w.r.t the fair value (Binance). At time t_0, I buy at BitMEX offer at price b - X and sell to Binance bid b. I paid taker fees twice, first at BitMEX (7.5bps) and then at Binance (4bps). I am now long BitMEX and short Binance. One could argue I am now "delta neutral" to some common component (excluding any arbs).

Time moves forward to t_1 which marks the time when the arb window has finally closed. Let us simplify things and assume that prices did not change at Binance. What happened was that BitMEX prices reflect fair values i.e. bid and ask are now b and a, respectively. I close my positions at both exchanges by selling to BitMEX bid at price b and buying at Binance ask at price a.

What is my net PnL?

Binance:
- Sell at b at t_0
- Buy at a at t_1
--> net pnl = (b - a) - 2 * binance_fee, where binance_fee = 4.0 bps

BitMEX:
- Buy at b - X at t_0
- Sell at b at t_1
--> net pnl = (b - (b - X)) - 2 * bitmex_fee, where bitmex_fee = 7.5bps

Summing together gives:

Total Net PnL = (b - a) + X - 2 * (binance_fee + bitmex_fee)

Given that b-a = -1tick 99.99% time, it is easy to see that in order to break even from the above trade (setting >=0 and solving for X), the mispricing component X has to be huge!

@Its Grisha, could you comment on this?
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