Bigger Ticks, Lower Fees, Larger Contracts: How SCXM Appeals to Makers and Takers
Staying true to our commitment of offering institutions a world-class platform for trading digital assets, Seed CX’s Digital Commodities Market (“SCXM”) was built to allow institutions to achieve best execution. This is in part driven by market makers willing to quote deep markets.
The execution cost of a trade, which is a function of liquidity, fees and slippage, is minimized on Seed CX:
- SCXM’s fees are the most competitive in digital assets.
- Low slippage on SCXM is achieved by having larger tick sizes and requiring that market makers quote larger minimum sizes, thereby offering deeper liquidity to all participants.
This creates a market that is a win-win situation for both the market maker and taker.
Unpacking this a little more, the tick size is the minimum price movement of the trading instrument. When specifying a price to trade at, it must be a multiple of the tick size. SCXM not only has larger tick sizes than other platforms, but also larger contract sizes for many of the digital assets that have a lower dollar value. Contract size is the deliverable quantity per 1 lot traded. For example, a contract size of 1 in the ETH/USD order book is for 10 ETH.
Our contract sizes and tick sizes are below:
For the taker, the benefit of larger tick and contract sizes and therefore thicker books is obvious — they are able to transact larger sized orders with the least slippage. In addition, due to larger tick sizes, market-makers aren’t reacting as frequently to external stimuli that would cause them to change quotes in pennies or fractions of a penny increment. This leads to a more stable and less ‘flickery’ market. The buy-side generally prefers executing at rounded price levels e.g $4,000, $4,500, $5,000, $10,000 etc. With multiple market makers, takers will find significant liquidity around key price levels.
But what’s in it for the market makers? Seed has created a number of ways to encourage market makers to post deep markets, including:
- A fee structure where the take fee is higher for those on the market maker program, which is intended to dis-incentivize MMs from crossing other MM orders. This results in a less toxic environment for market makers to perform their duties.
- The ability to make markets using ‘post only’ limit orders. This order type allows participants to send a limit order at a specified price but if that order were to cross the market and be filled , it will be canceled. This allows market makers to develop algorithms that quote markets based on a model without worrying about crossing a resting order when their orders go out.
- Low latency and connection reliability are the foundations on which successful market-making models are built. Seed CX provides an institutional grade infrastructure allowing market makers to reliably trade, cross-connect directly with us at NY4 and access the market using either our FIX protocol or Web API.
- The ability to quote a market with larger tick sizes than other trading venues. This point is explained more in detail below.
For the BTC/USD order book, most exchanges have a tick size ranging from one millionth of a penny ($1 x 10–8) to $0.10. Therefore, there will almost always been a market inside SCXM’s $1 wide market. What this means is that if you’re a market maker on SCXM, it is highly unlikely that you’d be exposed to order flow toxicity caused by arbitrageurs or others trying to pick you off. In other words, a trader quoting on another venue will not be able to lean on your quotes on SCXM because yours will be a wider market. However, as a market maker, you can always lean on other markets while quoting on SCXM because of the existence of tighter markets elsewhere.
However, as a market maker, you can always lean on other markets while quoting on SCXM because of the existence of tighter markets elsewhere.
You might ask, “If there are tighter markets elsewhere, why would I trade on Seed CX?” This boils down to the concept of best execution — minimizing slippage and achieving fills at the overall lowest cost.
Take fees of 6 to 8 basis points on SCXM are by far the lowest in the industry especially for participants that don’t trade a lot of volume (and make fees are 0 basis points).
The most competitive fees, combined with deeper and more stable liquidity at each price level, provides the lowest cost of execution in the digital asset space. This is on top of many other benefits of trading on SCXM, including FIX connectivity, a broad range of fiat pairs, margin trading, secure custody, robust compliance, multi-user accounts and a rich reporting infrastructure.