Articles related to algo trading and software tools aiding automated investment operations.
By Marek Koza, Product Owner of Empirica’s Algo Trading Platform
Among trading professionals, interest in cryptocurrency trading is steadily growing. At Empirica, we see it by an increasing number of requests from trading companies, commonly associated with traditional markets, seeking algorithmic solutions for cryptocurrency trading or developing trading software with us from scratch. However, new crypto markets suffer from old and well-known problems. In this article, I try to indicate the main differences between traditional and crypto markets and take a closer look at a few algorithmic strategies (known as trading bots on crypto markets) that are currently effective in the crypto space. Differences between crypto and traditional markets constitute an exciting and deep subject in itself, which is evolving quickly as
the pace of change in crypto is also quite fast. But here I only want to focus on algorithmic trading perspectives.
First, there is a lack of regulations in terms of algorithmic usage. Creating DMA algorithms on traditional markets requires a great deal of additional work to meet reporting and measure standards as well as limitations rules provided by regulators (e.g., EU MiFIDII or US RegAT). In most countries, crypto exchanges have yet to be covered by legal restrictions. Nevertheless, exchanges provide their own internal rules and technical limitations, which, in a significant way, restrict the possibility of algorithmic use, especially in the HFT field. This is crucial for market-making activities, which now require separate deals with trading venues.
As for market-making, we should notice an almost non-existent derivatives market in the crypto world. Even if a few exchanges offer futures and options, they only apply to a few of the most popular cryptocurrencies. Combining it with highly limited margin trading possibilities and none of the index derivatives (contracts that reflect market pricing), we see that many hedging strategies are almost impossible to execute and may only exist as a form of spot arbitrage.
As for market-making, we should notice an almost non-existent derivatives market in the cryptoworld. Even if a few exchanges offer futures and options, they only apply to a few popular cryptocurrencies. Combining it with highly limited margin trading possibilities and none of the index derivatives (contracts that reflect market pricing), we see that many hedging strategies are almost impossible to execute and may only exist as a form of spot arbitrage.
The above-mentioned facts are slightly compensated for by the biggest advantage of blockchain currencies – fast and direct transfers around the world without banks intermediation. With cryptoexchange APIs mostly allowing automation of withdrawal requests, it opens up new possibilities for algorithmic asset allocation by much smaller firms than the biggest investment banks. This is important due to two things. Firstly, there is still no one-stop market brokerage solution we know from traditional markets. Secondly, cryptocurrency trading is distributed among many exchanges around the world. It could therefore be tricky for liquidity seekers and heavy volume execution. It implies there is still much to do for execution algorithms, such as smart order routing.
Another difference is direct market access for algorithmic trading. While on traditional markets, DMA is costly, cryptocurrency exchange systems provide open APIs for all their customers that may be used without upfront prerequisites. Although adopted protocols are usually easy to implement, they are often too simplistic. They do not usually offer advanced order types. Besides, the order life-cycle status following is cumbersome and trading protocols differ among exchanges since each one requires its own implementation logic. That makes a costly technical difference compared to traditional markets with common standards, including FIX protocol.
Fast, precise and up-to-date data are crucial from an algorithmic trading perspective. When a trader develops algorithms for cryptocurrencies, she should be aware of a few differences. APIs provided by crypto exchanges give easy access to time & sales or level II market data for everyone for free. Unfortunately, data protocols used in the crypto space are unreliable, and trading venue systems often introduce glitches and disconnections. Moreover, not every exchange supports automatic updates and an algorithm has to issue a request every time it needs to check on the state of a market, which is difficult to reconcile with algorithmic strategies.
The APIs of most exchanges allow downloading of historical time & sale data, which is important in the algorithmic developing process. However, historical level II data are not offered by exchanges. We should also notice that despite being immature, the systems of crypto trading venues are evolving and becoming more and more professional. This forces trading systems to follow and adapt to these changes, which adds big costs to systems’ maintenance. In the following sections I overview a few trading algorithms that are currently popular among crypto algo traders because of the differences between traditional and crypto markets listed above.
SMART ORDER ROUTING
Liquidity is, and probably will remain, one of the biggest challenges for cryptocurrency trading. Trading on bitcoin and Ethereum, and all other altcoins with smaller market capitalization, is split among over 200 different exchanges. Executing a larger volume of assets often requires seeking liquidity in more than one trading venue. To achieve that, cryptocurrency traders may apply smart order routing strategies. These follow limit order books for the same instrument from different exchanges and aggregate them internally. When an investment decision is made, the strategy splits the order among exchanges that offer the best prices for the instrument. A well-designed strategy will also manage partially filled orders left in the order book in case some volume disappears before the order has arrived at the market. This strategy could be combined with other execution strategies such as TWAP or VWAP.
The days when simple cross-exchange arbitrage was profitable with manual execution are over. Nowadays, price differences among exchanges for the most actively trading crypto assets are much smaller than a year ago and transactional and transfer costs (especially for fiat) still remain at a high level. Trading professionals are now focused on using more sophisticated arbitrage algorithms such as maker-taker or triangular arbitrage. The former works by quoting a buy order on one exchange, based on VWAP, for a particular amount of volume from another exchange (the same instrument) decreased by expected fees and return. A strategy is actively moving quoted order and if the passive gets executed, it sends a closing order to the other exchange. As the arbitrage is looking for bid-bid and ask-ask difference and maker fees are often lower, this type of arbitrage strategy is more cost-effective.
Triangular arbitrage may be executed on a single exchange because it looks for differences among three currency pairs that are connected to each other. To illustrate, let us use this strategy with BTCUSD, ETHUSD, and ETHBTC pairs. This strategy keeps following order books of these three instruments. The goal is to find the inefficient quoting and execute trades on three instruments simultaneously. To understand this process, we should notice that the ratio between BTCUSD and ETHBTC should reflect the ETHUSD market rate. Contrary to some FX crosses, all cryptocurrency pairs are priced independently. This creates numerous possibilities for using triangular arbitrage in the crypto space.
Market making should be considered more as a type of business than as just a strategy. The main task of a market maker is to provide liquidity to markets by maintaining bid and ask orders to allow other market participants to trade any time they need. Since narrow spreads and adequate prices are among the biggest
factors of the exchange’s attractiveness, market making services are in high demand. On the one hand, crypto exchanges have special offers for liquidity providers, but on the other hand, they require from new coins issuers a market maker before they start listing an altcoin.
These agreements are usually one source of market maker income. Another one is a spread – a difference between a buy and a sell price provided to the other traders. The activity of a market maker is related to some risks. One of them is inventory imbalance – if a market maker buys much more than sells or sells much more than buys, she stays with an open long or short position and takes portfolio risk, especially in volatile crypto markets. This situation may happen in markets with a strong bias or when market maker is quoting wrong or delayed prices, which arbitrageurs will immediately exploit. To avoid such situations, market makers apply algorithmic solutions such as different types of fair price calculations, trade-outs, hedging, trend, and order-flow predictions, etc. Technology and math used in market making algorithms are exciting subjects for future articles.
Read more about how we execute market making strategies for crypto exchanges
Fast-developing crypto markets are attracting many participants, including more and more trading professionals from traditional markets. However, the crypto space has its own specificity, such as high decentralization, maturing technology, and market structure. Compared to other markets, these differences make some strategies more useful and profitable than others. Arbitrage – even simple cross-exchange is still very popular. Market making services are in high demand. Midsized and large orders involve execution algorithms like smart order routing. To embrace the fast-changing crypto environment, one needs algorithmic trading systems with an open architecture that evolves alongside the market.
As we know, over the past several years, we have witnessed a real computer revolution. We have practically all available solutions replacing us with computers. These are already such advanced technologies that are already able to make a decision for us, and what’s more, they do it faster and more efficiently than man. It is particularly visible in trading, where several years ago all decisions were made by man. Now Traders are equipped in computer programs who are able to do all the work. However, the market is flooding with information on how many new programmes have been hiring by financial institutions recently. But what about us with retail traders? How should we deal with this situation? It remains for us either programming learning or uses trading bots (free/paid) from the Internet. There are really many of them when you looking for information on the web. That’s why I decided to check 3Commas in this short article. One of many users and additionally paid TradingBots. Let’s have a look at one of them – 3Commas. They were started in 2014, there are over 120,000 users currently being served with transaction volume in the tune of $60 million being handled every day, supported 23 exchanges- data from 3Commas website. You can trade on all exchanges from one single interface from 3commas’ window. Up to date, they support Bittrex, Bitfinex, Binance, KuCoin and Poloniex, Bitstamp, HitBTC, Cex, GDAX, OKEX, Huobi, YOBIT.
How well do 3commas trading bots work?
On the website, we can read that: “3commas is a cryptocurrency trading bot that provides a wide range of tools and services for users to choose from. It performs real-time market analysis using powerful algorithms for getting you the best trades possible”. Sounds interesting? Is this the right place to find a solution for retail traders? 3Commas offer a few types of trading bots: Simple, Composite, Short, Composite short. You can choose which one you want it depends on your individual approach to the market. At the moment available is almost 90 trading bots. Does quantity mean quality?
Browsing information about bots, I wonder why the best strategies work only 30 days. How to trust this kind of bots with short history (just 30 days history)? How do I find out how it behaves with high market volatility? I don’t know. I couldn’t find this kind of information on the 3Commas website. For institutional investors or professional retail investors, this kind of question is fundamental. If you invest money you should know how much you can earn at what possibility of loss. That’s why it’s better for your wallet, to wait for a strategy with a long history to know what to expect.
Can I make a profit on real market with 3Commas?
Let’s see, how 3commas trading bots work. As a retail trader, I would like to try one of these 90 strategies. I choose for my example one “Simple Long Strategy” and I opened Paper Account. Pairs: USD_BTC, USDT_LINK, USD_LTC. Target profit 5%. On 3Commas website we can read the short description: “Simple Long Strategy gives you the possibility to make price increases”- information from 3Commas website. It looks simple to buy a lower price and sell higher price. The bot opens new deal according to one of the conditions that are available for selection during the creation. After that, it immediately puts a coin for sale. If the price rises and the order gets filled, the profit goal is achieved. In case of a price fall, the bot places safety orders below the purchase price every X%. Every filled safety order is averaging the buy price, and it makes possible to move the TakeProfit target lower and close the deal without losing profits in the first price bounce.
My strategy has been worked for 14 days. Completed 15 orders and give me $0.16 profit ($10.000 balance). Strategy performance results and statistics below.
Whether the profit is big or small I leave the answer to you. The rate of return is positive (+0,16$), therefore we should be satisfied (really ?). My “New Bot” did not lose money. Of course, everything was happening on the real market but money was virtual. You should also know that is possible to change strategies parameters at any time and can adapt it to your current needs but I did not do that because left my 100% decisions to the bot.
The main purpose of trading bots is to automate things which are either too complex, time-consuming, or difficult for users to carry out manually. Good trading bots can save a trader time and money by collecting data faster, placing orders faster and calculating next moves faster. In my case, I just set the parameters and Trading Bot did the rest but is it enough to tell that the strategy is good? Please rate it yourself. Meanwhile on the market situation looks very interesting for my example (charts below). The market moved up, how I expected. As you can see from the charts below I could earn more money in this period of time.
You also need to know that 3Commas is not for free. They have four subscription plans: Junior from €0 (your total balance across all accounts is $750 and no bots), Starter €24 (without limits for trading, no bots), Advanced €41 (Simple bots), Pro €84 (Simple, Composite Bots). The interesting thing is that you don’t know how much you can earn but you immediately know how much you have to pay!! Profits are potential but costs are fixed.
How safe is 3Commas?
3Commas don’t go into too many details regarding the security protocols that they choose to employ, however, it’s worth remembering that you don’t actually hold any funds on the platform and your trading bots are not able to make withdrawals from your linked accounts.
Similar to other trading bot platforms, your trading bots connect with your exchange accounts via API and then proceed to carry out automated trades on your linked exchanges. While this process takes place, users aren’t required to make any cash/crypto transfers to external accounts and simply need to provide their API keys which are generated by their exchanges.
These keys provide the trading bots with restricted access to user accounts strictly to conduct trades and do not grant the bots with any withdrawal rights. This also means that if your account becomes compromised, and some hackers were able to gain control of your trading activity, they still wouldn’t be able to directly access your exchange accounts in order to make withdrawals. However, the standard personal security rules of crypto still apply, as they could still have a detrimental effect on the funds held in your exchange accounts. Hackers have been known to obtain API access to exchange accounts, and commander the bots to purchase high quantities of low-value coins that the hackers have already previously purchased. After artificially inflating both the demand and price of said coins, the hackers then sell off their personal holdings for a profit, leaving the compromised account owners holding funds in the low-value coins.
3Commas has made a positive impression. It is also worth mentioning about Key Features:
- Technology – Automated trading takes place via API integration with cryptocurrency exchanges and the bot works around the clock with any device and users can access their trading dashboard on desktop and laptop computers. The team have also developed mobile apps for both Android and iOS
- Tools – The platform provides a good range of trading tools and in addition to the automated bots and performance analytics, users are able to create, analyze and back-test crypto portfolios and monitor the best performing portfolios created by other users. In addition, users can engage in social trading and follow and copy the actions of other successful traders.
- Functionality- 3Commas utilises a web-based platform, and features an easy to use and intuitive user interface that includes a wide range of functions and detailed analytics. Users can make use of short, simple, composite, and composite short bots, and set stop loss and take profit targets, as well as customise their own trading strategies.
Strong points of 3 Commas Bot Platform
- Emotionless, fact-based trades make sure that decisions taken are taken entirely based on the ideal conditions with little room for doubt, instinct, and human error. This reduces the intensity of the decision-making process and helps to take logical and high-profit decisions.
- Good exchange connections.
- The Smart Trading option that makes use of ‘trailing take profit’ keeps the user away from a loss when trading. Since it is designed to stay in the loop and adapt itself to the market, it is an intelligent solution to make as much as possible with a trade.
- Easy to set up for beginners, making sure that newcomers can navigate the 3Commas bot and make trades without any hassles.
- A well-laid-out dashboard and visualization of data allow the users to keep track of everything that is happening while boosting their appeal and ease of use.
- The free access offers a great trial so that users can make full use of the platform.
- A large number of exchange offers a wide array of information centres, making sure that your decision is well thought out with multiple inputs.
- The fact that users can refer and copy portfolios of successful traders.
Weak points of 3 Commas Bot Platform
- Security protocols are not explained with great clarity, raising concerns about whether the trades are truly secure. Users can, of course, enable the 2-factor verification for additional security, but the fact that not much is said about it leaves room for concern.
- The plans change regularly and might prove to be a bit confusing to say the least with 3Comms’ paid plans, commission plans, and a mix of both.
- The balance has to be filled up for commission, which may be a hindrance for many users.
Using trading bots for trading makes life easier. It can save traders a lot of time but will give it earn real money? Popular trading bots available to individual investors (regardless of whether paid or free) have one basic problem, namely the speed of response to changing market conditions, as well as the speed of placing and sending orders. This is not their strength. You will not find any information about latency, what is the maximum number of orders that can be sent per second. Using low latancy software will give you advantage on the market over retail bot users. Therefore, institutional investors have an edge on the market.
But retail bots are good place to start education on how automation on the markets can work.
Read reviews on follwing bot platforms:
There is quite a hot market for cryptocurrency trading platforms and algorithmic trading bots. New crypto traders and active traders from capital markets are pouring in funds into algorithmic strategies and bots to make the most out of the constant opportunistic cryptocurrency fluctuation. On the other hand trading platform, providers and investment bots are tailoring their strategies to be tuned well to different scenarios depending on the type of events occurring within the market.
Due to the expansion of development from these trading bots and their adaptability to different events, the process of choosing one has become quite challenging, even for those with technical and trading background, hence at Empirica, we decided to bring knowledge about professional crypto trading bots to interested readers and traders and our selected bot for this article is Cryptohopper.
In this review, we will cover relative features included in Cryptohopper trading platform. We analyze ways that traders can utilize Cryptohopper for their trades. We also take a look at their tool from a technical point of view (our team at Empirica has been focused on the institutional algorithmic trading platform and market making algorithms for almost 10 years). Later in the review, we will also take a look at options we believe Cryptohopper lacks. But first and foremost:
What is Cryptohopper?
Cryptohopper is an retail algorithmic trading platform with a series of configurable trading features (more on professional algorithmic trading platform). Cryptohopper’s platform is shaped around 5 key elements, which each have been developed further to meet the needs of traders. The 5 key elements are:
- Mirror trading
This feature allows investors to copy the trades of experienced and successful forex investors. Strategies are available through a marketplace, some free and some paid.
- Paper trading
A simulated trading practice to assess trading algorithms with real and live data.
- Strategy designer
A technical indicator assembler which lets traders design their strategies using the listed indicators. There are currently somewhere around 130 technical indicators provided by Cryptohopper.
- Algorithmic trading
An automated way of executing trading algorithms with a specified set of configuration.
- Trailing stop
It’s a feature designed to stop strategies to operate if a defined trigger has been pulled.
Which exchanges are supported by Cryptohopper?
There are in total of 10 exchanges that are supported by Cryptohopper. Exchanges are KuCoin, Bitvavo, Binance, Coinbase pro, Bitterex, Poloniex, Kraken, Huobi, Bitfinex and Binance.US.
How can I trade with Cryptohopper?
Depending on your sophistication level and trading knowledge, Traders can utilize Cryptohopper platform to their use. There are two bots, the market-making and Arbitrage bots and there are also strategies that can be used to select a set of indicators to form a strategy.
Market Making Bot
The market making bot is designed for retail investors (check market making bot for professional users). It is designed to perform liquidity provision to the market of traders’ choice. The market making bot is a configurable algorithm that executes buy and/or sell (take and/or make) by placing a layered limit of buy and sell orders.
To initiate using the market making bot, traders must go through the preliminary configurations. Starts with choosing an exchange and setting up the API keys. Even using the API the fund still will be located in the exchange and in order to trade on the exchange, traders need to generate an API key and then connect that to their Cryptohopper account.
After the initial configuration, there is also a set of more advanced Market Making configuration. Market and Pricing is the second stage of Market Making setup at Cryptohopper. This stage includes configuration of the market and which pair trader is interested in. Then moving on to the strategy setup with market trends. Market trends are either uptrend, downtrend or it could stay as neutral. Additionally, the order sequence of buying and selling with a given sequence, the order layer which represents the tiered buy and sell orders that are going to be placed and the moving on to the amount constraints within layers (e.g. buy amount, higher ask and percentage lower bid).
The Cryptohopper Market Making bot is also equipped with an “Auto-cancel” functionality which based on the configuration determines when to open and close positions. There is also a time limit to trigger the cancel on the bot. Seemingly the most important feature of the Auto Cancel is the Cancel on the trend, which enables auto cancelling on the bot when the marker changes to a direction e.g. from neutral to a downtrend or from neutral to uptrend and etc. Cancellation on the bot could also be triggered with percentage change, this only happens if the market has a certain specified percentage change or within a given period. The auto-cancel feature also works with the depth limit, which Traders can set from a minimum of 1 to a maximum of 500. Additionally, Traders that are interested in Cryptohopper Market Making bot can set their “Stop-loss” settings. Stop-loss can be triggered in the event of a turn in the market.
Cryptohopper market making bot also provides a revert and backlog feature, where it can move all the failed orders to the Traders’ backlog. Traders can also revert all their cancelled orders from the backlog if Traders decide to revert back a failed market maker orders and re-execute the orders. There are many more settings on reverting back orders that can be automated with configuration, to name of the settings, only revert if it will lead to a profit, or revert/not revert with market trends such as neutral trend, downtrend or uptrend.
In order to slow down the market making bot, Cryptohopper introduced the cool down feature, which the bots cooldowns by removing the order after a certain time has passed.
Cryptohopper has designed a dashboard with some widgets for Traders to monitor the market making bot in action. There is a trading view widget which is a visual representation of the current prices.
Among other widgets available on the Cryptohopper dashboard, there is the order book visualizations with the possibility of manual Market Making which enables buying and selling to be connected to each other and will input that order into the Market Making bot logs.
Cryptohoppe also has created an inventory for all failed trades to be stored in a place called backlog. In order for Traders to be able to use the Cryptohopper Market Making bot they need to be subscribed to the “hero hopper Pro” package, which costs a monthly subscription fee of 99$.
The Arbitrage bot:
The Arbitrage bot of Cryptohopper is designed to capitalize from changes across different markets. The bot allows to trade discrepancies in the market, taking advantage in market price between the same pairs on different exchanges.
Just like the market making bot, the Arbitrage bot also requires a pre-setup procedure to get going with the bot. The procedure starts with setting up the maximum open time of all buy orders, which determined the number of minutes a buy order remains open before the order is cancelled. Following that, there is the maximum open time of all sell orders which does the same thing but for all sell orders.
The setting up procedure then takes traders to exchange setting, where traders should specify two exchanges that would like to perform their arbitrage. Afterwards, they will set the percentage sell amount, which it should use to create the amounts which are being traded and then the Arbitrage amount per market which how much of trade at a time should take place.
In case interested trader would like to utilize exchange specific configuration, they can set minimum profit that they would like arbitrage with. Additionally, there are options to have the maximum open time of the Arbitrage. Traders are also given the possibility to simultaneous arbitrages which determine the maximum number of simultaneous or concurrent arbitrages. Furthermore, they set rate on buy and sells which specify the amount the Arbitrage should check.
The Arbitrage dashboard also includes a backlog where all failed trades will be stored. The dashboard also has the latest Arbitrage trades that were both successful and failed. There are also other widgets inside the Arbitrage dashboard, e.g. exchange arbitrage dashboard results, the last five trades and market Arbitrage results.
Traders using Cryptohopper platform could create a trading strategy with a collection of indicators they have selected. These are the indicators to buy and sell trades. Cryptohopper has created a strategy designer feature where traders create and custom their strategies. There are three ways trades can utilize a strategy. First is to use Market Strategies, these are strategies bought on the Marketplace (we cover features of Marketplace later in this article). Strategies bought from Marketplace which could also be automatically be updated every time the seller of the strategy makes changes on the strategy. Second is built-in strategies, Cyrptohopper offers a set of built-in strategies that are offered free of charge. These are rather basic strategies such as uptrend strategies, buy the dip strategies, Bollinger strategies and etc. Third and last is My strategies, these are custom made strategies that traders built.
Strategy designer is a place where traders can personalize their technical analysis setting. There are given a set of indicators where traders can find and configure a wide selection of trading indicators. Traders on cryptohopper can decide on the chart period, buy and sell signals and candle period when selecting an indicator. With candle patterns, traders can directly respond to price movements from the chart data of an exchange.
Furthermore, traders can design their strategies by adding a JSON code, this section is designed for more technical and programmer traders. These traders could also modify existing strategies. Once strategies are configured and up and running, Cryptohopper strategy dashboard allows traders to monitor their strategies.
The marketplace is a section within the strategy creation process. This unit is designed solely for social and mirror trading. This is where traders with a usually lower level of experience and knowledge in trading can browse already created strategies and use it for their funds to invest with.
There is a set of strategies and templates available in the marketplace. Each template and strategy has a corresponding base-currency and exchange. Therefore templates can be chosen based on traders preferences. Additionally, all templates have information about their ratings, total downloads, modifications and recentness.
The marketplace also consists of Signalers. All signals in the marketplace correspond to an exchange. A trader can configure their trading using only signals. The Signal configuration could limit orders. The setting also allows traders to take profit with a given percentage set.
Cryptohopper provides traders with a set of statistics in order for traders to be able to monitor the performance of their strategies and trades. There is a variety of ways provided in the statistics dashboard to see how trades and strategies are performing.
The time period for all buy and sell order, allocation of funds based on currency, open positions and base currency reserved. Traders can view their profit stats basing on currency invested on, base currency returns, the base currency gained/lost in current positions and trading fees paid.
Profit based on sell triggers is another statistic available for traders to monitor profit related to percentage profit, trailing stop loss and auto close within time. Traders can also view profits based on buy triggers that we generated by strategies, signalers, trailing stop buy.
For traders who would like to be familiar with Cryptohopper as a trading platform, there is a tutorial-like instruction supported by Cryptohopper itself and other instructors can also use this academy portal to provide education knowledge to interested traders.
Cryptohopper has done a decent job working out a tool that traders would feel comfortable doing their trades. We really liked the interface and how they have designed a user journey that would fit a different type of traders with different level of expertise. The wording in the platform is well explanatory and hints around important features. Though, as a solution provider for professional crypto market makers, we believe the assessment of market trends are done manually by users and very sensitive to human error. The market making bot has a low ability to manage more market at once and needs of content human supervision.
Check our take on how trading bots for professional crypocurrency traders are build and designed.
Read reviews on follwing bot platforms:
Empirica has successfully finished the implementation of its Algorithmic Trading Platform in one of the largest brokerage houses in Poland.
Brokerage house will use our software to:
- aid its internal trading operations, like market making of derivatives on Warsaw Stock Exchange
- offer functionalities of our platform to its institutional clients, which will be able to build, test and execute their own algorithmic trading strategies
Implementation included connecting of our software system directly to the system of the Warsaw Stock Exchange (Universal Trading Platform delivered by NYSE Technologies), as well as the integration with transaction systems of a brokerage house. Additionally, we have fulfilled and successfully passed tests regarding the highest security, stability, and performance requirements.
This implementation is an important milestone for our system. The usage by a team of market makers is proof that our system is capable of performing high-throughput and low latency operations on the level required by most sophisticated traders on the capital markets.
Schedule your appointment right now to learn more
Next implementations of our Algorithmic Trading Platform by customers don’t stop us from developing the platform itself. Working agile requires us to keep the pace in short and frequent iterations, which in case of product means frequent releases, keeping the whole product line stable.
A few iterations that we planned in our 1.3.4 release, code named by our developers ‘The Firebolt’, will include among others:
– even faster real-time replication of all server-side components in master-slave mode (for deployment in larger institutions)
– extended client side backtesting capabilities
– sophisticated charting of backtesting results and statistics
– multiscreen mode of client side application
– additional web-based server-side module for administration & management
For those curious about the release name and unfamiliar with Harry Potter, Firebolt is:
“The state-of-the-art racing broom. The Firebolt has unsurpassable balance and pinpoint precision. Aerodynamic perfection.”
—Harry Potter: Quidditch World Cup
“The Firebolt has an acceleration of 150 miles an hour in ten seconds and incorporates an unbreakable Braking Charm. Price upon request.”
—Harry reads about the features of the Firebolt.
Speed, precision, balance, perfection. These are the words that describe our software, therefore choosing the code name was kind of obvious :).
The Firebolt broom
High Frequency Trading, known also as HFT, is a technology of market strategies execution. HFT is defined by technically simple and time costless algorithms that run on appropriate software optimized for data structures, level of memory usage and processor use, as well as suitable hardware, co-location and ultra low-latency data feeds.
Although HFT exists on the market for over 20 years, it has became one of the hottest topic during past few years. It is caused by several factors, such as May 6, 2010, “Flash crash”, latest poor situation on the market and Michael Lewis book – “Flash Boys”. Let’s look where all that fuss comes from.
Among other things, the advantage over other market participants and ability to detect market inefficiencies is the reason why so many people critics HFT so much. Most common charges put on the table are:
- Front Running – HFT companies use early access to incoming quotes to buy shares before other investors and then turn around and sell him just bought shares with slightly bigger price.
- Quote Stuffing – Way of market manipulation by quick sending and withdrawing large number of orders. Because of speed of operations, it creates a false impression of the situation on the market that leads other participants to executing against phantom orders. Then there is nothing else to do, but to exploit favorable prices by HFT investors.
- Spoofing – Another method for market manipulation by placing orders and then cancelling them for price increase/decrease. It is based on placing big order on the market to bait other investors, and when the market starts to react, quickly cancel it. Then new price allows to gain some profit by HFT investor.
But that’s just a tip of the iceberg. It can be often heard that there is lack of proper HFT regulations, exist false belief that there are Dark Pools without any regulations where HFT companies can hide their activity, and there is still active argument if HFT brings liquidity to the market or just useless volume.
Bill Laswell once said “People are afraid of things they don’t understand. They don’t know how to relate. It threatens their security, their existence, their career, image.” That phrase perfectly fits to what is happening now on High Frequency Trading topic. When people would like to take a closer look on how exchanges work, probably, they would be less sceptic to High Frequency Trading.
Thus, on most, maybe even on all, exchanges exist two mechanism which can efficiently handle problem of quote stuffing and spoofing. First of them is limitation of number of messages per second that can be send from one client. For example on New York Stock Exchange there is a limit of 1000 messages/sec, so it means that if HFT company burst whole 1000 of messages in first half of the period, in second half it cannot send any message, so it’s cut out of the market. Other limitation used by exchanges is a limit of messages per trade. It hits even harder in quote stuffing and spoofing. In most of the cases limit is around 500 messages per trade and if someone exceed it then he should be prepared for fines. On top of it company that frequently break limits could be banned from exchange for some time.
If we talk about front running, first thing we have to know is a fact that front running, in the dictionary meaning, is illegal action, and there are big fines for caught market participants who use it. Front running is using informations about new orders before they will go to the order book. Let’s say Broker gets new order with price limit to process, but before putting it to exchange, he will buy all available shares at better price than limit and then he execute client’s new order at limit getting extra profit. That’s highly not allowed and that’s not what HFT companies do.
All they do is tracking data feed, analyzing quotes, trades, statistics and basing on that information they try to predict what is going to happen in next seconds. Of course, they have advantage due to latency on data feed and so on, because of co-location, better connection and algorithms, but it’s still fair.
HFT companies have to play on the same rules as other market participants, so they don’t have any special permits letting them do things not allowed for others. Same with Dark Pools, specially that they are regularly controlled by Finance Regulators.
First, we have to know that suppliers of liquidity, i.e. Market Makers and some investors use HFT. They place orders on both sides of the book, and all the time are exposed to sudden market movement against them. The sooner such investors will be able to respond to changes in the market, the more he will be willing to place orders and will accept the narrower spreads. For market makers the greatest threat is the inability to quickly respond to the changing market situation and the fact that someone else could realize their late orders.
System performance in this case is a risk management tool. Investments in the infrastructure, both a software and hardware (including co-location), are able to improve their situation in terms of risk profile. The increase in speed is then long-term positive qualitative impact on the entire market, because it leads to narrowing of the spread between bids and offers – that is, reduce the transaction costs for other market participants, and increase of the liquidity of the instruments.
HFT AND MARKET QUALITY
In April of 2012. IIROC (Investment Industry Regulatory Organization of Canada), the Canadian regulatory body, has changed fee structure based so far only on the volume of transactions, adding the tariffs and fees that also take into account the number of sent messages (new orders, modifications and cancellations). In result, introducing new fees made trading in the high frequencies more difficult. It was very clearly illustrated by data from the Canadian market.
Directly in the following months these fees caused a decrease in the number of messages sent by market participants by 30% and hit, as you might guess, precisely the institutions that use high-frequency trading, including market makers. The consequence for the whole market was increase in the average bid-ask spread by 9%.
NO PLACE FOR MISTAKES
When people talk about HFT, both enthusiast and critics, it is not rare to hear that HFT is risk free. Well, on the face of it, after analyzing how HFT works you would possibly agree with it, but there is a dangerous side of HFT that can be not so obvious and people often forgot about it. HFT algorithms works great if the code is well written, but what would happen if someone would run wrong, badly tested or incompatible code on a real market?
We don’t have to guess it, because it happened once and it failed spectacularly, it was a “Knightmare”. Week before unfortunate 1st of August Knight Capital started to upload new version of its proprietary software to eight of their servers. However Knight’s technicians didn’t copy the new code to one of eight servers. When the market started at 9:30 AM and all 8 server was run, the horror has begun. Old incompatible code messed up with the new one and Knight Capital initiated to lose over $170,000 every second.
It was going for 45 minutes before someone managed to turn off the system. For this period Knight Capital lost around $460 million and became bankrupt. That was valuable lesson for all market participants that there is no place for mistakes in HFT ecosystem, because even you can gain a lot of money fast, you can lose more even faster.
HFT is a natural result of the evolution of financial markets and the development of technology. Companies that invest their own money in technology in order to take advantage of market inefficiencies deserve to profit like any other market participant.
HFT is not as black as is painted.
Aldridge, Irene (2013), High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems, 2nd edition, Wiley,
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