The old saying goes, “Numbers don’t lie.” That’s the mantra for cryptocurrencies this year, as blockchain powered coins have had an exceptional 2017 thus far. The total market cap is over $600 billion, tens billions of dollars worth of coins are traded each day, and over 1,300 coins exist in the open market. The only problem? There are over 120 competing cryptocurrency exchanges.
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Typically, competition is good–the invisible hand of the free markets tend to leave only the best and brightest alive. However, the sheer number of cryptocurrency exchanges has actually hurt investors. The system as a whole is wildly inefficient, resulting in trading process, that is extremely fractured.
Fixing Issues
This means that investors not only deal with administrative headaches (such as account setup and access) but legitimate trading problems like thin liquidity, slow execution speeds, and uneven prices. One company, XTRADE.IO, is creating a standalone trading platform to resolve these issues. Their goal is to build a proprietary trading system for cryptocurrencies that serves as a one-stop-shop for large traders and funds.
XTRADE.IO’s first step is to develop a financial information exchange (FIX) application programming interface (API) that will allow institutions, hedge funds, and quant traders to communicate with the major crypto exchanges. By connecting all crypto markets to one FIX application, traders will have streamlined access to all the data and market information they need.
Next, XTRADE.IO will create their standalone trading platform called XTRADE Pro, which has features like consolidated book orders, hotkey order entry, and custom order types, bringing industry standard technologies to individuals and institutions alike. XTRADE Pro is the central hub from which funds, individuals and institutions can run their trading operations.
Lastly, XTRADE.IO will create a Single Point of Access (SPA) to aggregate liquidity across exchanges.
Now, this all sounds well and good, but how does it address the trading issues mentioned above?
#1 Liquidity!
XTRADE.IO’s system combats thin liquidity by using its FIX API to limit slippage and narrow spreads. The traditional method involves spreading an order out over time. However, cryptocurrency prices are notoriously volatile, so at times the amount lost to slippage may actually be more than the amount lost because of price fluctuations.
In contrast, XTRADE.IO’s system simultaneously routes an order to several exchanges, thereby executing the order in a small amount of time while also minimizing slippage. By splitting the order into “parent” and “child” orders, the XTRADE.IO team estimates they can reduce both execution times and slippage costs by 96%.
What’s more, low trading volumes typically result in higher transaction fees. This is because when liquidity is thin, prices tend to fluctuate more violently and spreads widen. Exchanges therefore charge a premium to make markets for these transactions.
However, XTRADE.IO’s platform allows for large players to get involved in cryptocurrency trading. Institutions, hedge funds, and quant firms who trade in large volumes can bring liquidity to thin markets, thereby stabilizing prices and resulting in lower transactions costs for all parties, big or small. Additionally, the SPA aggregates liquidity across exchanges, further narrowing spreads.
In order to dramatically increase execution times, XTRADE.IO will create a private network that provides access to trading services and market data feeds. By building custom routing paths with dedicated internet access (DIA) technologies, XTRADE.IO’s private network will be two to ten times faster than the public internet.
With servers on both U.S. coasts, XTRADE.IO’s network covers the entire country. The current internet latency for order entry and execution is 150 ms, but XTRADE.IO’s solution has reduced that latency to an average of 1.5 ms. Roughly 100x faster than the current standard.
The combined effect of higher trading volumes and quicker execution times results in fairer, more accurate prices for cryptocurrencies. Coupled with a far lower rate of slippage, narrow spreads, and small transaction costs, XTRADE.IO ensures that its clients will get the best prices available. And individuals benefit from this set up as well. Higher liquidity and narrower spreads means that small trades can be executed on a more frequent basis, encouraging market participation from all types of traders.
The goal is to have the alpha and beta versions of the trading platform launched by Q2 and Q3, respectively, followed by the SPA by year’s end. By 2019, the project should be in production mode. By then, who knows what the cryptocurrency markets will look like. If XTRADE.IO has any say, they’ll be a whole lot better.
