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.
One thing I don't understand about the potential for crypto HFT is how to deal with the long transaction verification times. With bitcoin, it can take a tx several mins to be verified on the blockchain. I've dabbled in bitcoin HFT for a few years, but am always stuck when it comes to this point.
There are a ton of arbitrage opportunities between exchanges, but the long transaction times are the equivalent of IEX's "speedbump." How do you deal with this?
*Note: IEX is the exchange started by Brad Katsuyama, one of the main figures in Michael Lewis' outstanding "Flash Boys."
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.
I was doing this on the now defunct Cryptsy with the popular alt coins. Using relatively basic exponential moving average calculations. There just really wasn't enough volume to be doing it constantly. I was lucky to get a few trades in a day that made sense. I made money, and lost money. Basically breaking even. Mostly just a learning exercise. At this point though, all of the big players are getting their hands in. Not really worth it anymore.
Are you using some sort of leverage (haven't heard about leverages for btc though)? Looking at btc price movements, it seems that you need either 1) very high bankroll or 2) loads of transactions to make it work, as minute/hour price movements are rather low, and even lower for smaller time ranges. (maybe that's a lame question, I have no trading experience, just curious and reading a bit about it).
1/ How do you think you or others can build an advantage if everyone is playing almost the same game? If I understand well, the arbitrage opportunities you are seeing, are seen by almost anyone.
2/ What tools/APIs/etc do you think are interesting to build? Since I am a cofounder of a softwae development company in the cryptocurrency space, I am looking for new insights but not have experience in the HFT space.
Is it HFT or algorithmic trading? In my view HFT is a based on arbitrage between exchanges. If so my experience is negative. The price fluctuations are too small to compensate for fees (0.5%) and most of the exchanges have no arbitrage within say 250ms interval.
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.
> 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.
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.
There's no objective standard for language usage, so it's perfectly possible for something to mean one thing in technical jargon of a specific field, and something else in colloquial usage.
Therefore, your claim that "begs the question" can't mean what 99% of people understand it to mean in colloquial conversation because it's a term of art that means something else in logic/rhetoric is invalid.
By the way, this reasoning is independent of etymology. "Beg the question" may at some point have only meant what you claim it means now (I don't know if it did or not) -- but that doesn't change anything, even if it's the case.
I'm not sure that is the definition, I believe it's: to make a conclusion based on a premise that has no more support than the conclusion.
i.e to introduce a premise begging to be questioned - that includes, of course, the assumption of a conclusion, (isn't that a different fallacy though? - circular reasoning) e.g.:
> bitcoin is profitable, because bitcoin traders are doing well
It pushes the argument somewhere (sometimes to a new claim; sometimes a consequence-of, or paraphrasing-of the original claim) but provides no argument for that direction either, begging for the new premise to be question just as much as the old, and otherwise providing no new clarity.
This being abstracted to any obvious omission of information, or even abstractions such as situations themselves "begging the question" as if personified, is just an extension of the same semantics.
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.
I work in HFT, though we don't deal with Bitcoin. I don't think volatility creates any value, but it can be a sign of market inefficiency if it's caused by a lack of liquidity (demand > supply). A typical market making strategy would be to provide liquidity while betting on mean reversion, which will have the effect of dampening volatility. The price won't necessarily trend in any particular direction, it should just dislocate less from some "true" theoretical value.
Generally speaking, liquidity is valuable, and risk is a problem. The volatility might be an indicator of liquidity, or at least attempts to reduce volatility may correspond with reduced liquidity, such as putting your money in a hedge fund that has restrictions on when you're allowed to pull your money back out.
On the other hand volatility can provide arbitrage opportunities for people who know what the "true" price would be. A simple theory suggest that there is a trend, zero or more cyclical patterns, and noise. If you can identify what is noise and what is not the trend, then you can trade against those prices. From the perspective of social utility, pricing error is bad for the economy, and the people who correct it get a share of the recovered efficiency in the market.
In the case of bitcoin it is difficult for me to imagine how to determine a true value. The supply is predictable compared to money, even though the factors that affect the supply of money aren't as unguessable as sometimes claimed. The demand for bitcoin though seems really difficult to understand. As a result its value is much more likely to resemble a random walk, which would mean that there is no mean for the price will revert to.
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.
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.
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 )?
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?
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.
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.
Note: the article confuses two distinct things wth each other, or at least makes it unclear: the transaction volume that is allegedly dominated by high-speed traders is in the forex market, with people trading a promise to e.g. USD, EUR and Yuan for a promise to bitcoins.
Only when someone withdraws his Bitcoin promise does it become a transaction on the blockchain. Until then it's just an exchange saying it owes you a certain amount of bitcoins. This becomes evident when an exchange defaults on this promise because of e.g. a hack, as has been the case with Mt. Gox, Bitfinex, Bitfloor and many others.
I don't think there's a specific frequency that qualifies as "high." All the qualities of hft stay the same so long as you are fast relative to "normal."
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. ;)
[+] [-] atemerev|9 years ago|reply
(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.
[+] [-] _spoonman|9 years ago|reply
There are a ton of arbitrage opportunities between exchanges, but the long transaction times are the equivalent of IEX's "speedbump." How do you deal with this?
*Note: IEX is the exchange started by Brad Katsuyama, one of the main figures in Michael Lewis' outstanding "Flash Boys."
[+] [-] drittich|9 years ago|reply
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.
[+] [-] kasey_junk|9 years ago|reply
[+] [-] overcast|9 years ago|reply
[+] [-] gedrap|9 years ago|reply
[+] [-] wslh|9 years ago|reply
2/ What tools/APIs/etc do you think are interesting to build? Since I am a cofounder of a softwae development company in the cryptocurrency space, I am looking for new insights but not have experience in the HFT space.
[+] [-] frrp|9 years ago|reply
Re: 4) what is the performance of your strategy?
[+] [-] vpupkin2017|9 years ago|reply
[+] [-] chis|9 years ago|reply
[+] [-] pdog|9 years ago|reply
[+] [-] napworth|9 years ago|reply
[+] [-] greenleafjacob|9 years ago|reply
[+] [-] wtbob|9 years ago|reply
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|9 years ago|reply
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.
[+] [-] DigitalJack|9 years ago|reply
Which begs the question: Who, then, is wrong?
[+] [-] umanwizard|9 years ago|reply
Therefore, your claim that "begs the question" can't mean what 99% of people understand it to mean in colloquial conversation because it's a term of art that means something else in logic/rhetoric is invalid.
By the way, this reasoning is independent of etymology. "Beg the question" may at some point have only meant what you claim it means now (I don't know if it did or not) -- but that doesn't change anything, even if it's the case.
[+] [-] wodenokoto|9 years ago|reply
The quoted sentence is the dictionary usage of the phrase.
[1] http://dictionary.cambridge.org/dictionary/english/beg-the-q...
[2] https://en.oxforddictionaries.com/definition/beg_the_questio...
[+] [-] Chris2048|9 years ago|reply
i.e to introduce a premise begging to be questioned - that includes, of course, the assumption of a conclusion, (isn't that a different fallacy though? - circular reasoning) e.g.:
> bitcoin is profitable, because bitcoin traders are doing well
It pushes the argument somewhere (sometimes to a new claim; sometimes a consequence-of, or paraphrasing-of the original claim) but provides no argument for that direction either, begging for the new premise to be question just as much as the old, and otherwise providing no new clarity.
This being abstracted to any obvious omission of information, or even abstractions such as situations themselves "begging the question" as if personified, is just an extension of the same semantics.
[+] [-] kneel|9 years ago|reply
High-speed trader's are taking advantage of arbitrage on zero fee digital currency exchanges.
[+] [-] empath75|9 years ago|reply
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.
[+] [-] pdovy|9 years ago|reply
[+] [-] rz2k|9 years ago|reply
On the other hand volatility can provide arbitrage opportunities for people who know what the "true" price would be. A simple theory suggest that there is a trend, zero or more cyclical patterns, and noise. If you can identify what is noise and what is not the trend, then you can trade against those prices. From the perspective of social utility, pricing error is bad for the economy, and the people who correct it get a share of the recovered efficiency in the market.
In the case of bitcoin it is difficult for me to imagine how to determine a true value. The supply is predictable compared to money, even though the factors that affect the supply of money aren't as unguessable as sometimes claimed. The demand for bitcoin though seems really difficult to understand. As a result its value is much more likely to resemble a random walk, which would mean that there is no mean for the price will revert to.
[+] [-] bb88|9 years ago|reply
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.
[+] [-] unknown|9 years ago|reply
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[+] [-] pfarnsworth|9 years ago|reply
[+] [-] kobeya|9 years ago|reply
[+] [-] Lerc|9 years ago|reply
That wasn't true in 2012. :-)
[+] [-] polskibus|9 years ago|reply
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 )?
[+] [-] cobbzilla|9 years ago|reply
[+] [-] xeniak|9 years ago|reply
[+] [-] Buge|9 years ago|reply
[+] [-] arthurcolle|9 years ago|reply
[+] [-] davidgerard|9 years ago|reply
[+] [-] chubs|9 years ago|reply
[+] [-] drawnwren|9 years ago|reply
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.
[+] [-] runeks|9 years ago|reply
Only when someone withdraws his Bitcoin promise does it become a transaction on the blockchain. Until then it's just an exchange saying it owes you a certain amount of bitcoins. This becomes evident when an exchange defaults on this promise because of e.g. a hack, as has been the case with Mt. Gox, Bitfinex, Bitfloor and many others.
[+] [-] unknown|9 years ago|reply
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[+] [-] imperialdroid88|9 years ago|reply
[+] [-] A_Crazy_Idea|9 years ago|reply
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[+] [-] Avalaxy|9 years ago|reply
[+] [-] netcan|9 years ago|reply
[+] [-] csomar|9 years ago|reply
[+] [-] atemerev|9 years ago|reply
HFT is when you are faster than most other traders. ;)