When Bitcoin emerged as the leading digital currency, it was characterized by a lot of fluctuation. Since its value either expanded or contracted frequently, traders used to find it tough to trade. For reaping benefits from their operations, traders had to conduct peer to peer transactions with strangers or take risks by dealing in insecure exchanges.
However, there has been a systemic change in the industry today. With the presence of regulated exchanges, asset-supported tokens, financially healthy crypto funds have led to tremendous growth in the crypto space.
Technology has created newer and more efficient methods of trading. Two well-known tools that have created a storm in the market are, high-frequency Crypto trading and Dark pool are widely utilized by traders today. Let us analyze more about these tools.
High-frequency Crypto trading
It deploys algorithmic trading programs for executing trades in an automated way. Most trades are fulfilled within one day by analyzing real-time market data. It is mostly used by hedge funds and proprietary trading firms.
High-frequency crypto trading helps in generating a higher return on investment for investors. Many leading crypto trading houses such as DRW, Flow Traders BV, and Hehmeyer trading which have a huge client base are making the move by acquiring a significant stake in crypto assets. Companies are cashing in on the growing investment demand for cryptocurrencies.
Friendlier regulations, professionalism in approach, and growing interest from institutional investors have made high-frequency crypto trading more attractive.
With the rise in the number of trading bots that support a variety of digital currencies, tailor-made trading strategies are being developed according to the parameters set by investors.
Depending on the extent of price swings in a day, there is a valuable opportunity in store to make heavy profits from intra-trading.
Popular techniques used in a High-Frequency Crypto Trading Platform
Colocation - It involves placing a trading server physically close to an exchange’s data center. This is done to prevent any delay involved in receiving information about market events. A competitive edge is earned over firms that are far away from the access point.
Market-making - This is a common technique where a trader places bids and asks in the same market and earns profits based on the spread. Funds will be moved as per the market conditions. There is a need for a solid understanding of how the exchange works before initiating market-making.
Arbitrage - It takes advantage of the price difference of the same asset across multiple markets. Specific orders will be created by spotting variations in the market. Experienced traders can make maximum benefits from arbitrage.
Pinging - Traders will use a series of small orders to outweigh the benefits of larger orders and not alter the market price too much. The seller’s range of prices will be determined through algorithms. Mostly, big movers who frequently conduct activities on Crypto Trading platforms make use of pinging.
News-based trading - Buying or selling digital assets occur based on news reports concerning the market. Trading strategies are developed depending on the favourability of the outcome. Specialized software is used to process the stories on a real-time basis. It is advantageous as every trader takes a lot of time to make an investment decision after reading a story.
Crypto Dark pools
Dark pools are the latest fad in digital trading though they have less intensity and execute traders slower than high-frequency trading. Mostly, dark pools are accessible only to a few private investors. They get executed secretly and remain out of reach for a large class of investors.
The main reason why Crypto dark pools are in high demand is due to the valuable liquidity that they render. Institutional investors who possess huge stakes of wealth prefer dark pools to withstand unfavorable market movement.
One of the well-known crypto dark pool projects that are being implemented is the Republic Protocol. It is still being tested and is open-source software. The order books are spread over multiple chains and are hidden. Many major blockchain investors such as Binary financial and Huobi capital are financially supporting it.
With the increasing prevalence of OTC brokers handling cryptocurrency trading, crypto dark pools have brighter prospects in store.
The long-term impact of High-frequency trading and dark pools on the cryptocurrency industry
Slower market participants would find it tough to deal in virtual currencies due to the speed at which high-frequency trading takes place.
This can lead to large-scale inequality in the market as an unfair advantage would be given to some parties over the other.
Sometimes, the servers installed in the system cannot withstand the impact of high-frequency trading and may crash which would lead to a glut in the market.
High-frequency trading can immediately impact the sentiment of investors leading to a change in their behavior.
It has a very negligible impact on long-term prices.
Dark pools are essential to eliminate the skeptical mindset that overshadows the cryptocurrency industry.
It attracts the attention of institutional investors and high net-worth individuals which will create a strong trust within the investment community.
Since major cryptocurrency exchanges charge hefty fees in form of registration, brokerage, commission, and charges for deposit and withdrawal, traders can switch over to dark pools for conducting operations at lower costs with adequate liquidity.
Though high-frequency crypto trading platforms and dark pools are the future of the industry, it requires licensing and more acceptable to change the traditional mode of operations. The technology will have a massive impact on the market and create a huge value proposition for the various stakeholders.
Nice article, learn a lot, thanks