Algorithmic crypto trading: market specifics and strategy development

By Marek Koza, Product Owner of Empirica’s Algo Trading Platform

Among trading professionals, interest in crypto-currency 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 interesting 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.

 

Read more about our tool for market making strategies for crypto exchanges  – Liquidity Engine

 

LEGISLATION

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, 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, restricts the possibility of algorithmic use, especially in HFT field. This is crucial for market-making activities which now requires separated deals with trading venues.

 

DERIVATIVES

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 of the most popular cryptocurrencies. Combining it with highly limited margin trading possibilities and none of index derivatives (contracts which reflect wide 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 of the most popular cryptocurrencies. Combining it with highly limited margin trading possibilities and none of index derivatives (contracts which reflect wide market pricing), we see that many hedging strategies are almost impossible to execute and may only exist as a form of spot arbitrage.

 

DECENTRALIZATION

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, cryptocurrencies 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.

 

CONNECTIVITY

A smart order routing strategy GUI

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, 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.

 

MARKET DATA

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 most probably will remain, one of the biggest challenges for cryptocurrency trading. Trading on bitcoin and etherium and all other altcoins with smaller market capitalisation, is split among over 200 different exchanges. Executing a larger volume on any type of assets often requires seeking liquidity on 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 aggregates them internally. When an investment decision is made, the strategy splits the order among exchanges that offer 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.

Empirica algorithmic trading platform front-end app (TradePad) for crypto-markets.

 

ARBITRAGE

The days when simple crossexchange 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 towards 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 is looking for differences among three currency pairs which 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 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 of using triangular arbitrage in crypto space.

 

MARKET MAKING

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 exchange’ 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 prices 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 on volatile crypto markets. This situation may happen in markets with a strong bias, or when market maker is quoting wrong or delayed prices, which will immediately be exploited by arbitrageurs. 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 an interesting subject for future articles.

 

Read more about our tool for market making strategies for crypto exchanges  – Liquidity Engine

 

SUMMARY

Fast developing crypto markets are attracting a growing number of 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. At the end of the day to embrace the fast changing crypto environment, one needs algorithmic trading systems with an open architecture that evolves alongside the market.

 

To see the original article click the button on the right.

 

Cryptohopper – Technical Review 2019

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).

Cryptohopper Trading Bot Review

 

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.

Cryptohopper Trading Bot Review

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.

Strategies:

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:

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. 

Cryptohopper Marketplace:

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.

 

Strategy statistics:

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.

Cryptohopper Academy

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.

 

Our take:

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.

Bitcoin and Arbitrage: hand in hand

Empirica in the press – ‘The age of robots … ‘

On the first of July 2014 large polish economic magazine Puls Biznesu published an article “The age of robots comes to Warsaw Stock Exchange’. Article is quoting, among others, Empirica’s representatives speaking on the topic of the growth of algorithmic trading in Poland. Excerpts below.

‘Popularization of algorithmic trading on conferences like this one is step in good direction, says Michal Rozanski CEO of Empirica, a company which delivers Algorithmic Trading Platform. Expert says that computers will never replace a human in all the tasks. First and the foremost machines are taking over the processes that human traders had to perform manually. ‘I am sure that the development of algorithmic trading will not change the soul of the markets. It will not change to the race of engineers. It is and always has been the race on new, better ideas.’ says Michal Rozanski. 

 In his opinion both small and big investors will benefit. ‘Appliance of algorithmic trading tools increases liquidity and descreases bid/ask spreads which in turn decreases transaction cost born by all investors’ adds expert.

Michal Rozanski stresses that appliance of algorithmic trading does not limit to transactions with shortt time horizon, e.g. counted in miliseconds. Each trader can designs algorithms adjusted for it’s own requirements. ‘Let’s imagine an investor who would like to open a large position on KGHM shares or futures on WIG20. To make it happen it’s best to divde the order to tens or hundreds of smaller orders, which allows to hide her intentions from other market participants. Investor remains anonymous and minimizes market impact of her large order.’ explains Michal Rozanski. 

‘I am convinced that development of algorithmic trading can be a breakthrough moment in the history of our market, as long as we will treat the matter seriously and deliberately. On Wall Street share of algorithms in total turnover is estimated at 50%, in Europe at 40%, and in Poland still at below 20%. ‘ says Adam Maciejewski, CEO of Warsaw Stock Exchange.

Link to article…

artykul_pb_era_robotow

Empirica holds workshop on Warsaw Stock Exchange

Algorithmic trading workshop took place on 27th of July 2013 as a part of the second conference held by economic magazine ‘Puls Biznesu’ and Warsaw Stock  Exchange.

Michał Różański, representing Empirica, held workshop on the practical aspects of selecting tools for algorithmic trading by financial institutions. He stressed and covered in detail, especially one aspect of algorithmic trading which is from our practical experience constantly undervalued – namely proper testing of algorithms.

Very interesting was also a lecture of Emil Lewandowski who showed an algorithm which was able to detect a flash crash an hour before it actually happened. Algorithm was implemented, backtested, executed and presented to all the participants our Algorithmic Trading Platform. It was indeed very interesting example of application of algorithmic trading!

Among other guest were representatives from IBM, Sungard, List and M10.

Link to event:

http://konferencje.pb.pl/konferencja/705,handel-algorytmiczny-cz-ii