How Seed CX Lowers Digital Asset Trading Execution Costs for Institutions
As of today, trading groups can now reliably execute over 100 BTC orders on either side of the order book (i.e., buy or sell) with around 20 bps slippage, making it one of the most efficient places to trade digital assets amongst other exchanges and OTC providers across the globe.
In this blog, I unpack the headline figure around execution costs, which is important to so many groups. For trading groups, execution costs can quickly turn what should be a profitable trading strategy into a money-loser.
To understand the impact of execution costs requires taking a look at how they’re calculated. Execution costs are made up of two components:
- Trading fees, and
Industry Leading Trading Fees
Seed CX offers some of the lowest trading fees on any exchange, specifically:
But fees are just the tip of the iceberg of execution costs. The part that is often not considered is called slippage, which is the difference between a trade’s expected price and its actual price.
Understanding Weighted Mid-Market Price
To understand how we calculate slippage, it is important to understand the concept of weighted mid-market price, in which we determine the current price of an asset as the average of the bid and ask prices. For example, if the bid is $3800 and the ask is $3810, then $3805 is the asset price.
But what if there was a quantity of one on the bid and 100 on the ask? Would it still be fair to say the current price is $3805 when there clearly exists selling pressure?
Here, utilizing the concept of weighted mid-market is most appropriate, calculated as:
WMP =( bid_qty*ask_price + ask_qty*bid_price) / (bid_qty + ask_qty)
In our above example, the weighted mid-market price would be calculated as $3800.10. It intuitively makes sense that the price is closer to the bid: with a large 100-lot sell order at the offer, the bid quantity of one is very likely to trade, meaning that the fair value should be very close to the bid price.
With the backdrop of weighted mid-market prices, we can define slippage. Here at Seed CX, we calculate slippage as:
slippage = | average_fill_price — weighted_mid_market | / weighted_mid_market
This gives us a number in percentage terms. In our above example, let’s assume a participant bought a quantity of 50 out of the 100 that were resting on the ask. The average fill price would be the ask price, $3810, and the slippage would be calculated as:
slippage = | $3810 — $3800.1 | / $3800.1 ≈ 26 basis points
Fighting Slippage with Larger Tick Sizes
By itself, one would think larger tick size would lead to higher slippage, and Seed CX has large tick sizes: the BTC/USD tick size is $5. If we assume a balanced orderbook (equal quantity on the bid and ask) the bid/ask prices of $3800/$3805, the weighted mid-market price would be $3802.50 and the slippage from either the bid or ask price would be $2.50/$3802.50 ≈ 6.5 basis points.
So why do we use larger tick sizes?
Because for the institutions that use Seed CX, larger tick sizes concentrate liquidity, especially around relevant price levels.
This should lead to average fill prices being closer to the weighted mid-market and thereby lowering slippage overall. I dive into more detail in a recent blog as to why in particular market makers are willing to post deeper depth on Seed CX including larger tick sizes, superior technology and specific order types.
Low Fees, Less Slippage, One Goal: To Be the Lowest Execution Cost Market
The table below shows the average execution cost over the past week on SXCM. We can then compare this to other trading venues by capturing order book snapshots from other digital asset exchanges (which we did every 30 seconds over a period of 30 days).
What the analysis showed is that average execution cost on Seed CX was among the lowest of all digital asset exchanges.
- For smaller BTC transaction sizes (25 BTC or less), the total execution cost was comparable to the top 3 major exchanges.
- For larger BTC transaction sizes (more than 50 BTC), we found that SCXM was on average nearly 25% cheaper than the top 3 major exchanges. The above table illustrates that we tend to provide cheaper execution costs, especially for larger transaction sizes.
Seed CX continues to work hard everyday to add more liquidity providers, and to build deeper and thicker books.
As we add more liquidity providers, we expect to be able to support transaction sizes in excess of 1000 BTC with minimal slippage. We’re carrying over the same principles of success from our BTC offering to ETH, BCH, and LTC, and we’ve already seen our ETH order book grow tremendously in liquidity.
By the end of the Q1 2019, our goal is the have some of the lowest cost of execution for all four products and to be the venue of choice for large digital asset transactions.