idap.io Ecosystem: Managing Liquidity and Effective Price Levels
One of the most important aspects to be considered while designing an exchange is the issue of managing liquidity. While coming up with the idea of idap.io, we put in considerable thought in deciding the best way forward for the management of liquidity on our exchange and designed our ecosystem to reflect these considerations.
We are going forth with three standard practices followed by legacy exchanges that have become quite ubiquitous in traditional markets. These are: Smart Order Routing, working with B2B liquidity providers and Market Making.
The IDAP Matching Engine houses Smart Order Routing (SOR) functionality. Through FIX APIs, the matching engine will match orders from different exchanges and liquidity pools, thereby acting as a single point of access for the customer. Aggregated bids and offers will thus be available on the platform, enabling best price for a trade, effective utilisation of custom algorithms and the freedom to get additional validation, control and statistics.
We will act as counter party for our clients and hedge positions with B2B liquidity providers, so that for any asset class, there are no gaps between buyers and sellers. Liquidity providers are important for the asset class they deal in, ensuring greater stability in the price of that asset and also improving the liquidity by easing the buying and selling at any price level. This will be especially important for spot trading.
We will also incentivise 3rd party market makers along with in-house market making systems. Market makers enhance market liquidity by consistently quoting buying and selling prices allowing for better price discovery (making markets more transparent) and contributing to market stability. This lets traders have a more seamless experience while executing trades.
Technologies and best practices are essential to maintain liquidity but the issue of liquidity is directly proportional to market participants and their willingness to trade more and more. Larger number of traders are not enough; higher number of trades and therefore greater trade volumes enable the deepening of the market liquidity. Diversity in the grades of traders therefore becomes important and it rests on two crucial factors: the inclusiveness of the trading ecosystem and its accessibility with respect to its multifaceted user base. To further trade volumes and bring more depth in liquidity we are innovating on two fronts:
- Implied Orders: We are introducing the vital functionality of implied orders so that our derivatives marketplace will not face the issues of scant liquidity and effective price levels will be enabled. Through our Matching Engine an interlink between the prices of futures outright, spreads and butterflies will be maintained. Implied logic is beneficial to participants trading these interlinked instruments since the interconnection allows them to access liquidity that would have otherwise been unavailable to them. Due to implied order functionality, a synthetic order is generated based on futures contract and spreads. For example, in the case of Bitcoin based derivatives, its butterflies and calendars will be low risk instruments, they will see larger bid and offer quantities and therefore greater liquidity and implied logic will tap into this liquidity for any Bitcoin futures contracts that have not been filled.
- Partnerships with Proprietary Trading Firms: In yet another first, we will provide a ‘Master Account’ for Proprietary Trading Firms so that they may generate the restricted sub-accounts (trade only) to the traders working within the firm. These sub-accounts will be limited in their capacity; traders will only be able to trade from these accounts but not make any withdrawals or deposits of funds. Entrance of Proprietary Trading Firms will greatly enhance the liquidity of our exchange and to this effect, we are fostering partnerships with many Proprietary Trading Firms eager to enter the crypto landscape. Moreover entrepreneurs wanting to set up trading firms around cryptos will also be encouraged in their efforts by the introduction of the ‘Master Account’ functionality.
Traders vary in trading styles and risk appetites. In our experience, profitable trading strategies include trading multiple instruments and lack of choices may impede a customer from trading freely. By providing a complete ecosystem with multiple derivatives for any given coin/token and a range of functionalities to avail from, we will ensure that traders will always find something to their liking and in this way, we will not miss out on different demographics among our potential user base. Thus, our offerings combined with our services will attract clients organically and more importantly will retain them.