
High-Speed Traders Are Taking Over Bitcoin - ca98am79
https://www.bloomberg.com/news/articles/2017-01-16/high-speed-traders-are-taking-over-bitcoin-as-easy-money-beckons
======
atemerev
I am one of those traders, and I'll happily share my observations.

(Before you ask -- no, there are no any good books and tutorials on HFT
trading. You need to grokk it on your own, or receive the knowledge by direct
transmission if you are an employee of HFT firm. However, there is "The
Problem of HFT" by Haim Bodek, which contains some nice essays from the
insider perspective and even some basic examples, though too specific within
US equity markets).

1) Bitcoin exchanges are the perfect playground to learn the basics of HFT.
All trading data is free and public, most traders are not sophisticated
enough, you can start as small as you like (being small is an advantage in
HFT), lots of low-hanging fruit are to be picked. HFT proliferation and arms
race is barely started on most exchanges.

2) The algorithms themselves are simpler than most people think. HFT trading
is mostly unrelated to arbitrage (inter-exchange arbitrage is much slower, and
it is a different discipline).

3) The engineering issues are _harder_ than most people think. Even more so
with inter-exchange arbitrage.

4) Bitcoin markets are small, and HFT potential capacity is quite limited.
Most algorithms I came up with work perfectly well on small scale (and running
successfully in production), but I am not making any riches out of it yet.

~~~
SNACKeR99
I wrote a bot but could never make money due to the transaction fees. I wanted
to make 15-20 trades per day. Instead, had to limit it to 3 or 4, meaning a
lot more burden on each trade to be right.

The funnest part of writing a bot is using all the historical data to observe
how the bot would have done during that period. I ended up checking thousands
of permutations of parameters by brute force to determine the best ones, but
in the end transaction fees killed me. I didn't have the confidence to do it
at a large enough scale to make money I guess.

~~~
radarsat1
Same experience here, several years ago. I'd love to know how professionals
manage to avoid problems with transaction fees. I guess it is just taken into
account during prediction, but it does seem to limit the number of tentative
transactions you can make, even if you cancel them.

~~~
logicchains
It's actually fairly simple: basically change the metric of a trade worth
taking from "one with expected profit > 0" to "one with expected profit >
expected fee". It does limit the number of potential profitable trades, and
hence fees are sometimes used as a way for exchanges to reduce trading volume.
Or to divert it; some Chinese (non-bitcoin) exchanges for instance charge
greater fees for intraday trading, to discourage speculation.

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greenleafjacob
Others here are missing the point. Until platforms like Bitfinex allowed
margin trading, arbitrage was impossible because the exchanges are extremely
risk averse. In order to arbitrage you would have had to buy on one exchange,
then wait for 3 confirmations (~40 minutes?) before the receiving exchange
would take the risk that the bitcoin was actually transferred. Now with short
selling it looks like you can instantly borrow a bitcoin on the exchange
that's inflated, then sell it immediately. You don't need to transfer between
exchanges - all done completely on internal paper transfers inside the
exchange.

~~~
Itsdijital
If you can immediately buy and sell between exchanges it should quickly level
the prices. Something like that is easy to automate, so any slight margin that
appears will be almost instantly leveled.

~~~
ProblemFactory
The buying and selling is fast and easy to automate.

The difficult part is in transferring non-bitcoin currency to and from the
exchanges.

If you for example buy bitcoin in the US and sell in China, then you end up
with a surplus of CNY on a Chinese exchange's account. Getting this converted
and transferred back to the US will incur exchange and transfer fees. The
transfers might also take weeks - which will limit you to cycling small
amounts of money slowly, or risking a lot of money at once if the exchange
"has banking issues".

In the end, even a 5% or 10% price difference might not be worth running the
arbitrage cycle on difficult to deal with exchanges in strange countries.

~~~
gcb0
the article is about doing this on a dozen chinese exchanges. no currency
conversion necessary when it is all CNY

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wtbob
> while the increasing dominance of sophisticated traders begs the question of
> how long the juiciest arbitrage opportunities will last.

 _Raises_ the question, not begs it. Begging the question would be to say,
'Bitcoin always generates profit, therefor it will always generate a profit.'
Begging the question is assuming the consequent of the argument; raising a
question is, well … raising one.

~~~
vidarh
I have, in nearly 35 years of using English, come across exactly 1 "correct"
usage of "begs the question" outside of comments like yours correcting people.

In other words: You're fighting a lost battle. I suspect if you put the two
common uses of it to a representative sample of people, that the majority
won't even know the original usage at this point.

~~~
afarrell
The problem is that "begs the question" is a poor textual representation for
what it means. "Assumes the conclusion" is a better affordance.

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kneel
"Taking over" is sensationalism.

High-speed trader's are taking advantage of arbitrage on zero fee digital
currency exchanges.

~~~
tajen
Yep, plus arbitrage isn't "taking over", no more than "retail is taking over
the manufacturing". It's just a characteristic of healthy stock exchanges.

Is there a cap on the growth of the blockchain? Since every transaction is
saved and every actor has all of the blockchain (Am I correct?), if HFT made
it double it size every week, will it reach an unmanageable size after a few
terabytes?

~~~
aianus
Trading is done off-blockchain on exchanges.

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empath75
Here's an economics question that I used to think about when I was trading
bitcoin:

Does volatility of an asset itself create value? It seems like the more
volatile the price is, the more opportunities there are to make big profits
trading the swings using a 'reversion to mean' strategy. Which would mean more
people trading it, which would mean that over time, the 'mean' price would
keep trending upwards, until that volatility reduced to the point where the
strategy was no longer profitable.

Does that make any sense at all? I'm sure there's a broken link in that chain
of logic somewhere.

~~~
bb88
Volatility usually is considered bad. Why would you want to invest in
something whose day to day price can change 20%? For day-traders and HFT
volatility is good, since they can (as you have said) ride the swings.

There's the value of a bitcoin, and the value that bitcoin brings to the
market. And those are two different things.

The value bitcoin brings is anonymous currency transactions and anonymous
speculation.

Now ask yourself what is the value of one bitcoin? It's not based on a
physical scarce resource like coal or oil. It's not based upon an actual
currency either (either gold backed or fiat). In fact the only value people
have in it is that other people invest in it. So speculation has created
value.

Volatility in this case is just a side effect of speculation.

~~~
logicchains
In some cases volatility is categorically good, e.g. if you have a put option
that's in the money. Volatility increases the chance of it either going far
into the money (so you profit) or far out of the money (in which case you can
just choose not to exercise the option): it increases potential reward without
increasing potential loss (you'll never lose more than the premium you paid
for the option).

------
pfarnsworth
This was evident on Coinbase a couple of years ago. You could sit there and
watch the bids and asks move up and down in a regular fashion on a Saturday
night. Probably super amateur HFT but HFT nonetheless.

------
kobeya
There's nothing in this article that wasn't true in 2012...

~~~
Lerc
>But for Zhou, a 35-year-old

That wasn't true in 2012. :-)

~~~
masterponomo
Kapow!

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polskibus
Which exchange doesn't take transaction fees? I checked BitMEX, GDAX and
OKCoin - all have takers fees. When I post an order that gets filled
immediately, I have to pay takers fee. Is my understanding correct that if I
post a limit order that incidentally is filled immediately, I pay the takers
fee ? Which exchanges only take commission on paying funds in/out ?

Does maker/taker distinction ignore the side of the transaction (ie. does it
matter whether an order is a bid or an ask to be considered a maker )?

~~~
DINKDINK
Taker fees are assessed on the party that removes liquidity from a market. If
one places a market order, you are removing liquidity either on the bid or ask
side and are assessed a fee. If you place a limit order, you are providing
liquidity and are not assessed a taker fee.

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cobbzilla
I heard somewhere that increasing HFT volume actually decreases overall
volatility as the arbitrage windows get smaller & smaller. is this the case?
is bitcoin any different in this regard?

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xeniak
High-speed trading on a "market" that allows ~10 transactions/second max?

~~~
Buge
Just like high frequency trading in the gold market doesn't require physically
handing bars of gold for physical dollar bills at high speed, neither does
high frequency trading bitcoin require any high speed blockchain transactions.

~~~
netcan
Great analogy.

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chubs
Is it possible to do HFT with bitcoin, given it has a 7 transactions-per-
second maximum rate?

~~~
drawnwren
They aren't trading possession on the blockchain in most cases. Generally, the
BTC is in an exchange's wallet and the exchange maintains the accounts of the
traders until the traders withdraw their assets.

edit: Some cross exchange trades (i.e. buy BTC on one exchange and sell on
another) would still require a move across the chain, but it all really
depends on what the exact mechanics of the trade are.

------
imperialdroid88
what exchanges are people using for this?

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Avalaxy
There are no HFT exchanges in the bitcoin world. All these trades are done
over the internet using HTTP. Hardly HFT.

~~~
atemerev
Most exchanges support real-time Websocket and some even FIX protocol. Even
HTTP-only for order entry is doable with advanced HTTP client frameworks (I
use Akka-http).

HFT is when you are faster than most other traders. ;)

~~~
BrandonBradley
I saw your other top-level comment as well. Are you using Akka Websockets to
interface with exchanges as well? Would love to share. See:
[https://github.com/blbradley/kafka-
cryptocoin](https://github.com/blbradley/kafka-cryptocoin)

~~~
atemerev
Looks nice! My own code is much messier (currently rewriting with akka-
streams). Yes, I'm using WS client from akka-http.

Liked how you pattern match directly on JSON messages, I should di it more. :)

~~~
BrandonBradley
Thanks! Feel free to continue the conversation through my listed GitHub
e-mail.

