Item — HN Reader

IMO people overestimate how much alpha is in knowing your customers’ positions (as exchange owner).

Open interest, volume and price data down to seconds is available via APIs in real-time, from which it is absolutely possible to build a model of positioning.

If you launch a new exchange, your biggest problem is lack of liquidity, meaning limit orders won’t fill ‘timely’ and market orders slip, which is very bad UX obviously.

That is why it is fairly obvious that one of the best market makers in the industry launched their own exchange; Alameda could provide excellent liquidity for FTX from day one.

1 comments

> IMO people overestimate how much alpha is in knowing your customers’ positions (as exchange owner).

I’ll say this as respectfully as I can: you’re wrong. Aside from algos, positions are the most closely guarded information in trading. If you know someone’s positions, you might be able to assess what their risk tolerance and stops would be, and you can exploit that.

If you’re a crypto exchange with huge highly leveraged perpetuals trading, you don’t have to guess where the stops are: you know exactly where those positions will be liquidated. Hell, you built the system to execute the liquidations.

So you just run an algo (you don’t even need funds/margin because hell you’re the exchange) to whipsaw people around and trigger this liquidations while you profit massively.

Agree. If someone knows your margin situation, they know where they need to push the price to stop you out. Simple as that. And when the exchange stops you out, they unload the position in the market at any price. This is not unique to Bitcoin. In China plastics markets same things happen. Opponents learn enemies’ margin situation from corrupt exchange and push till he is liquidated. I don’t think there is much new to Bitcoin in terms of trading and all the games being played. It has gone on in all the other markets long before this.

I’m very sure that there is more money (for big high volume exchanges) in providing an environment with low liquidations (which amplify price moves against the index, again bad UX) instead of driving customers into them and profiting from trading these wicks.

The biggest risk to established exchanges is ‘regulatory alienation’ — and having millions of USD in daily liquidations probably is not helpful here.

Won’t say these trades aren’t done (data needed to build positioning models is public), my only point here; v unlikely by exchange owners.

You don’t need the exchange to do this. You simply need corrupt employee of the exchange with access to the information.