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On the evolution of crypto exchanges over the last half-decade from the perspective of HFT trading
Since we joined the cryptocurrency markets in 2017, there has been meaningful progress in the quality of the market and the trading infrastructure. Particularly, spreads, latency, and exchange stability improved considerably, as we will delve into in the following paragraphs.
Ancient History of 2017
Back in 2017, manual arbitrage was still quite profitable. Exchange systems were slow, spreads were wide, and the majority of tokens did not have a market maker. The amount of wash trading
was alarmingly rampant, with an estimated 95% of reported cryptocurrency trading volumes being fake.
During the 2018-2020 bear market, many improvements were made. Liquidity began to be taken more seriously, and wash trading calmed down a notch. Today, while still a wild west compared to traditional markets, topics like wash trading and market manipulation are being taken seriously.
Exchange connectivity is typically measured using RTD (Round Trip Delay). RTD representing the time, measured in milliseconds, required to send an order to an exchange and receive back a confirmation. Limiting RTD variability has been a challenge for the crypto exchanges and is a critical factor for high-frequency traders.
Exchange latency is assessed using a metric known as P90. P90 means that from the list of RTDs with an exchange, it represents the slowest RTD among the fastest 90%. P90 is a way to estimate the typical slow RTD, with the bottom 10% considered abnormal. This type of calculation is important for high-frequency traders, as we rely on specific speeds to execute strategies correctly.
Today, some exchanges have succeeded in limiting their worst RTD to only twice as slow as the average RTD, which is significant progress. Even in less advanced exchanges, erratic spikes that once reached hundreds of milliseconds or even a full second are a thing of the past across the industry.
In addition to the improvement in RTD speed and variance, another equally significant achievement has been the overall exchange stability during high user loads. Since 2021, we’ve experienced no exchange outages, where an exchange becomes unresponsive for minutes or even hours.
The adoption of faster communication protocols has been a central factor in this progress .In 2017, exchanges primarily relied on the Rest API. Over time, Websocket and now FIX API (which is specifically designed for online financial activities) have been integrated into many venues. It's worth noting that Binance transitioned to Websocket only in the past year, completing an industry- wide upgrade.
Market Efficiency and Institutional Services
Today, BTC spreads on the leading exchanges are comparable to those of the top 25 most traded US stocks. Market depth has expanded, but not as much as the price, with more liquidity positioned closer to the spread. This reflects the professionalization of the market makers and improved capital efficiency.
Another major improvement has been the emergence, since 2019, of companies like Copper and FireBlocks, which provide immediate transfer of funds between exchanges and accounts. They enhance safety and efficiency when managing accounts across many exchanges.
We should also acknowledge the rise of cryptocurrency prime brokers like FalconX and Hidden Road, which simplify investment and certain types of trading for institutional investors and hedge funds.
Onward and upward!