How do traders provide value?
- goods traders transfer value across space, financial market traders transfer value across time as well as space (or venue)
- hold risk during the transfer
- By connecting space and time, increase convenience and productivity
- customers want to transact as much as they want, whenever they want, wherever they want. Market makers must provide this service
Market Making
Fair Value
- Create a model of fair value (can be as simple as a fast moving average)
- Charge a spread around that fair value, ideally spread is a function of uncertainty of your model
- bid: FV - charge(std), ask: FV + charge(std)
- Back up in the opposite direction of your inventory (i.e. if long, adjust FV down, be more aggressive as it gets substantial inventory)
- Backtest (be careful!) and verify the strategy over historical data
- decent historical data
- a backtesting environment
- Backtests are always wrong
Arby
- Quote the bid on perps based on the bid on serum dex
- serum dex bid: 50,000 → merps bid: 50,000 - fees - charge(x, y, z ...)
- as soon as you are filled on merps bid, you sell on serum dex
- Latency very crucial if others are doing same strategy
- Diversify to more primary venues as a competitive edge
Common Signals - will fill in more details after talk
- order book average
- sum(bids) + sum(asks)
- weight inversely
- beware of spoofers
- trade imbalance
- keep a running tally of buys - sells over some time T
- ema + standard deviation for volatility
- funding rates, basis
- if funding rate high, sell perps, buy spot on margin
- profit perps funding rate - spot USDC interest rate
- Many more that I never figured out