Efficient Frontier
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Efficient Frontier

You can also watch the panel here

Binance Off the Charts Virtual Conference with Roei Levav- BinanceTurns3

Summary of the main points from the panel moderated by Charlie Shrem with Efficient Frontier CEO ; Roei Levav, Hummingbot co-founder ; Michael Feng, QCP partner ; Darius Sit and Cumberland’s Head of BD ; Justin Chow. Enjoy!

Participants:

Charlie Shrem: The moderator of the panel. Investor, host of Untold Stories and of course, the founder of The Bitcoin Foundation and BitInstant.

Michael Feng: CEO of Hummingbot, a DeFi product that allows anyone to create market making bots.

Darius Sit: CEO of QCP, a cryptocurrency trading firm with a focus on quantitative methods and derivatives, as well as a geographic focus on Southeast Asia.

Justin Chow: Head of BD at Cumberland, cryptocurrency trading division of DRW and one of the largest liquidity providers in crypto markets.

Roei Levav: CEO of Efficient Frontier, a cryptocurrency algorithmic trading firm and liquidity, with a specialty in derivatives and HFT strategies.

The industry’s evolution

What are some of the changes you’ve seen in the industry?

Michael Feng:

  • Since he started 2 years ago in 2018, there’s been huge changes in the industry, especially with the introduction of derivatives and lending products, creating a microcosm of the traditional financial industry
  • Potentially crypto will eat the traditional finance industry in the future

Do people trade crypto differently than equities, commodities, etc?

Justin Chow:

  • Differences: In crypto, we trade directly through the exchange, which operate an API and GUI for others to trade on them as well. In the past several years, the industry has much more developed execution methods than before. Meanwhile, there are no general chatroom for crypto like there are in Bloomberg Terminals . Because of confidentiality, it’s typically directly between two firms.

What type of edge are people looking for HFT? Are people really trading at 3–4 seconds?

Roei Levav:

  • It’s actually much faster than this. Nowadays, we’re seeing round trips of around 20–100 milliseconds. This has actually improved significantly. When we started, it was very far from this. We’re now down to the milliseconds.
  • HFT is becoming more and more similar to traditional markets.
  • Binance is probably leading the infrastructure improvements right now, alongside several other major exchanges

Darius Sit:

  • Bitcoin is changing from being a non-institutional asset to becoming an institutional asset
  • Just this year, we’ve begun to see futures and options growing significantly
  • Many of the top names from traditional finance like Renaissance Technologies and Paul Tudor Jones are taking steps into the space
  • In Asia, adoption is a lot deeper than people think
  • Usage of stablecoins for doing traditional business is huge

The Rise of Derivatives

Charlie Shrem:

  • “I didn’t expect derivatives to be so hot.”
  • It’s hard for retail investors to understand the need for derivatives. Any mature market needs options and derivatives

Darius Sit:

  • The March 12th drop was due to the derivatives, the derivatives market allows for very high leverage, thus causing the huge moves
  • However, as the infrastructure and market mature, we will see volatility begin to decline gradually

Michael Feng:

  • You can use Hummingbot to build any type of trading bot. Their users tend to be serious algo traders.
  • What they found is that professionals don’t really care much for small caps but there is still an opportunity there.
  • When you play in larger markets, you’re playing against larger folks who understand markets much better. Their users are small fish and thus, should be playing in smaller ponds
  • Liquidity Mining — Token projects can reward users for market making on their markets. This makes it even more attractive to market make.

What is the strategy for someone trading small caps?

Michael Feng:

  • HFT — most strategies are designed to make money regardless of which way the market moves. You place buy offers and sell offers on the market
  • When there are large moves, your inventory position changes and you are on the wrong side of the market. In DeFi this is called impermanent loss. In centralized exchanges, this is just called volatility risk

What happened on March 12th?

Roei Levav:

  • Stop losses were being triggered. When the market was going down, many products especially on BitMEX were using BTC as collateral.
  • The collateral value itself was shrinking and the position value was going down
  • This creates a downward moving cycle: a perfect storm
  • If the markets were stable enough in terms of connectivity, this would actually help the market. But exchanges are not stable enough yet.
  • You cannot expect large hedge funds or institutions to enter the space without a proper derivatives market that you can hedge with, especially options, which allows you to hedge very specifically

What is the difference between market making and wash trading?

  • The difference is actually pretty easy to explain.
  • Market making is placing orders on the book to make sure that you have enough liquidity to be able to buy or sell
  • Wash trading is when you trade with yourself to “create” volume. Efficient Frontier was struck by the prevalence of this when we first entered the market

Cumberland, QCP, Hummingbot, and Efficient Frontier are the blue-chips, the shining cities on the hill [in contrast to the often scammy nature of the crypto markets and industry]. Has the industry cleaned up in the recent years?

Justin Chow, Cumberland:

  • Part of the reason why the market can be difficult is because of the difficulty of risk management. Cryptocurrencies are assets that have 90–100+ vols.
  • These are not instruments that you should be playing with a large amount of leverage.
  • Folks get excited when markets move. But this is where you can get caught up.
  • Technical infrastructure issues often cause the market to gap. If you were to leave an order to exit a position, and Bitcoin were to go against you, you might not actually get filled.
  • If you run scenarios over and over in your testing, you have to take this into consideration. Only 1 out of every x trades you put might be filled in a black swan situation. Many folks have been caught up on the wrong side of the move and lost a big position because of this.
  • If people are planning for BTC to go to 100k or more, you should be playing the markets for the long run and not take too much risk in the short-run, only to lose it all.

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