Produced | Odaily (ID: o-daily)
Produced | Odaily (ID: o-daily)
On some exchanges, there are some mysterious trading pairs that are not open to everyone.
This area is called the dark pool.
For example, on the Kraken exchange, dark pool trading pairs ending with ".d" (such as XBT/EUR.d XBT/USD.d), charge an additional 0.01% handling fee, and are only open to second-level or above customers.
New research shows that a growing number of crypto trades are being executed through OTC markets and dark pools, which originated as block trades in traditional financial markets and are designed to provide them with anonymity without affecting market prices. According to the report of Aite Group, 8% of the encrypted trading volume in 2019 is already going through dark pools, which accounted for only 5% in 2017, and no dark pools appeared in 2014.
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Dark Pool Trading: Anonymity and Large Amounts
The emergence of dark pools stems from institutional investors’ needs for confidentiality and liquidity in bulk commodities, stocks, and foreign exchange transactions. The main function is to significantly reduce the impact of large orders on the market, enabling large investors Trade without fear of negative market volatility, ensuring that you avoid the knock-on effect of large public sell or buy orders - slippage.
The flip side of dark pools is that large transactions go unreported and, if disclosed, can lead to a quick crash. This is a bit like OTC, but it is anonymous (dark pool operators know who the counterparty is, but buyers and sellers usually do not know each other) and automated, and can be connected to the venue by moving bricks and other methods.
In the traditional stock market, dark pools have existed for a long time. Dark pools are preferred by large investors over public stock exchanges such as the New York Stock Exchange or NASDAQ, who need an anonymous and fast-executing platform to buy and sell large numbers of shares (dozens of shares). tens of thousands or even millions of shares), without worrying about affecting the market price of the stock. Dark pools have grown in size so much over the years that they account for an estimated 15% of trading volume in the US and 6% in Europe.
The same is true for dark pool transactions in cryptocurrency trading systems.
Liquidity issues are particularly prominent among cryptocurrency exchanges. According to industry insiders quoted by the standard consensus, the top ten domestic market makers basically control 90% of the exchange liquidity. Not long ago, bitFlyer, a Japanese cryptocurrency exchange, publicly stated on Twitter that it has implemented self-operated trading of cryptocurrencies in the company's trading services in order to improve supply liquidity.
Today, when there are many large cryptocurrency investors, the demand for large transactions appears from time to time. The impact of large orders on the market is large enough to even cause a market crash. For large investors, OTC trading is a major option in order to reduce market impact. OTC transactions accounted for 60 percent of all cryptocurrency trades in 2018, and this is expected to grow to 65 percent in 2019, according to a report by Aite Group. This compares to just 32 percent in 2016.
For exchanges, in order to improve liquidity, market makers are standard configurations; in addition, platforms that aggregate transaction depth have also emerged for a while, and have become popular. According to Babbitt statistics, there are currently 12 platforms that include the "aggregate transaction" function. home, most of which will launch the aggregation transaction function this year.
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track gradually gaining attention
At present, the encrypted dark pool track is undercurrent:
In 2019, Zhao Dong, founder of DFund and cryptocurrency wallet RenrenBit, announced investment in WOOTRADE, a dark pool for cryptocurrency trading, and said that this is one of the few projects that DFund has invested in in the past year;
Decentralized dark pool protocol Republic Protocol raised $33.8 million from crypto hedge funds in 2018;
In 2016, brokerage TradeZero partnered with Bitcoin pioneer Jered Kenna to launch a dark pool trading tool;
San Francisco-based cryptocurrency exchange Kraken has offered clients a dark pool trading facility for an additional fee since 2015; Bitfinex offers clients a similar service.
It can be seen that dark pool services are deriving new startups and services from exchange affiliates.
1、Bitfinex
As one of the world’s leading centralized exchanges, Bitfinex’s cryptocurrency liquidity is abundant; even so, the company is trying to attract institutional investors and large cryptocurrency holders through its dark pool service; the exact details of the Bitfinex dark pool It is difficult to know, according to public information, the fees involved in the dark pool are slightly higher than normal transactions.
2、Kraken
Kraken started dark pool trading as early as 2015. According to its introduction, in Kraken dark pool, each trader only knows their own orders. Traders can place large buy and sell orders anonymously, allowing them to avoid unfavorable price fluctuations.
Kraken will charge an additional 0.10% for dark pool orders. Dark pool trading is available to all Kraken clients with accounts with level 2 or higher verification. The minimum dark order quantity is 50 bitcoins, and only limit orders are supported. The dark pool will accept trade orders between bitcoin and euros, dollars, yen or pounds. Dark pool pairs are specified with a ".d" extension (eg XBT/EUR.d or XBT/USD.d).
3、Omega One
In March of this year, the cryptocurrency exchange Omega One announced the launch of the dark pool Omega Dark, claiming that it has obtained a provisional license from Bermuda and is completely independent. “The emergence of institutional-grade dark pools for digital assets may change the rules of the game for existing cryptocurrencies such as Bitcoin, while creating conditions for the conversion of stocks, bonds, and real estate into digital assets,” its press release stated.
Omega One CEO Alex Gordon-Brander also has a background in traditional finance. Brander designed corporate bond trading platforms at MarketAxess and Bridgewater Associates, respectively, and hedge fund foreign exchange trading platforms.
4、TradeZero
Shortly after Kraken announced its dark pool project, TradeZero, an online broker-dealer registered with the Securities Commission of the Bahamas, also announced in 2016 that it had partnered with serial bitcoin entrepreneur Jared Kenner ( Jered Kenna to create "dark pool" transactions for Bitcoin and eventually other digital currencies. TradeZero director Daniel Pipitone said that amid heightened global uncertainty, larger mainstream investors are looking to diversify away from stocks and that TradeZero will allow large trades without raising market prices or alerting other investors of their positions .
In this dark pool, the minimum initial balance is $10,000 or its currency equivalent. Digital currencies such as Bitcoin (BTC) are accepted. Qualifying customer accounts will be activated on a first-come, first-served basis.
5、WOOTRADE
WOOTRADE, which was born in September this year, is incubated by Kronos, a quantitative investment research institution.
In the view of the founder Jack, on the one hand, “aggregated transactions did not provide real more liquidity to this market, because aggregated transactions are just transfers, and these liquidity were originally in other exchanges, but aggregated transactions did not increase liquidity for the market nature, that is, they do not do quantitative trading to provide liquidity; but as a quantitative team, our high-frequency quantitative strategy trades a large amount every day, and these are the real liquidity we provide to the market.” ; On the other hand, "The OTC market is very large, why can't such a highly liquid market and retail transactions be mixed on one platform, or in one system?"
As a result, WOOTRADE aims to aggregate the liquidity of major exchanges and other trading platforms. In addition, Kronos's own high-frequency quantitative exchanges and liquidity generated by other quantitative institutions are injected into WOOTRADE, so that it can help exchanges, wallets And OTC service providers provide their customers with deeper trading margins, more competitive buying and selling prices and faster transaction speeds.
The founder Jack believes that the advantage of WOOTRADE is that on the one hand, the separation of dark pool services from exchanges can enable exchanges, wallets and other institutions to "don't spend time managing the trading experience, and can innovate in their advantages."
The co-founder of Kronos, Mark Pimentel, graduated from Carnegie Mellon University and worked in the high-frequency trading department of Citadel Investment Group and the electronic market maker department of Knight Capital Group. Managed the third and fourth largest dark pools in the US; the dark pools managed by Mark on the London Exchange accounted for 35% of the trading volume of the entire exchange.
Currently, Kronos has announced its first client, RenrenBit. Its founder, Zhao Dong, is the founder of DFund, a well-known investment institution in the blockchain field, and a shareholder of the Bitfinex exchange. WOOTRADE will provide liquidity services for the currency trading module built in the RenrenBit application, which will enable the trading depth of this module to meet the trading needs of almost all users.
When Zhao Dong talked about the reasons for the investment, he cited his experience in doing cryptocurrency OTC services since 2013. In his opinion, “For traders, such as large investors who really want to buy coins, reducing costs is very important. We believe that WOOTRADE is suitable for this kind of product, and it is suitable for customers with a particularly large transaction volume.” Regarding the high transaction fees that dark pools may require, Zhao Dong also has his own experience: “It is acceptable for large investors to buy 1,000 coins at 1% .Retail investors don’t want you to earn a thousand dollars. There is no difference between good and bad. It’s just how to better meet the needs of customers. I think the direction of WOOTRADE is very good.”
For the WOOTRADE model, some people in the industry believe that it is more like an intelligent routing for matching orders in the whole market, or a liquidity bridge provider plus its own market making, but its on-market trading method is different from that of dark pools. WOOTRADE responded that its order book has both an on-site part that can be publicly provided to exchange users, as well as an off-site dark pool; the dark pool is also open to other quantitative teams, and Kronos is only the first quantitative team to participate.
6、Republic Protocol
At present, the dark pool services of Bitfinex, Kraken and Omega One are all exchange incubation businesses; WOOTRADE is incubated by the quantitative team. The decentralized dark pool protocol Republic Protocol is also worthy of attention. According to its information, the protocol uses ZK-Snarks to build, deploy and run general-purpose privacy protection applications, uses secure multi-party computation (sMPC) to match orders, and keeps the price of orders confidential. and transaction volume. Its long-term goal is to create an open-source protocol that powers dark pools, with the protocol's native REN token powering the system.
Among them, the protocol token Ren can pay the transaction fee of the beta version of the main network, and another function is the bond contract, which gives the transaction parties and dark nodes the qualification to join the RenEx dark pool transaction.
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Challenges of Crypto Dark Pools: Liquidity and Fairness
Compared with the well-developed dark pool platforms in traditional finance, dark pools in encrypted exchanges still have some challenges.
First of all, the adoption of dark pools in the crypto market is still slow. In terms of accessible dark pools, the crypto market lags far behind the traditional financial market. This track needs more and sufficiently professional participants.
Dark pools also have certain requirements for market structure and liquidity. The operators of some of the above-mentioned dark pools are cryptocurrency exchanges. On the one hand, it is to meet the needs of some large customers; Dilemma, exchanges may not need to worry about these problems.
There is no public information in China showing that the exchange does this business. Some people in the industry believe that the domestic exchange users are mainly retail investors, and the dark pool business is mainly based on the bulk trading needs of large institutions, which can be met by other channels at present. Jack, the founder of WOOTRADE, believes that the high technical threshold required to establish and maintain dark pools may be the reason why there are few such pools in China.
Binance Research also believes that how to view the space of dark pool platforms in the encrypted digital currency market depends on the development of the structure of traders in the entire market. For example, institutions with large long-term long positions may choose dark pool platforms in order to seek better quotations than manual OTC (or avoid the technical threshold of interacting with hundreds of exchanges) when entering the market. The foundation of growth needs is whether the digital currency market can maintain its upward trend for a long time in the future and the progress of supervision.
For short-to-medium-term speculative traders similar to CTA strategies, the dark pool market may not be very attractive. The transaction price of digital currency = the best transaction price in the open market + handling fee + spread cost, although dark pools can erase the "spread cost". However, for large miners and other long-term passive income bitcoin institutions, whether they care about the spread as low as 1% or the speed of cashing out when cashing out is also a problem.
In addition, regarding the role of dark pools in the cryptocurrency world, Binance Research believes that there are still four problems:
1. In order to ensure liquidity in the dark pool trading market, there are generally market makers. Market makers actually move liquidity in the entire market. The consumption of liquidity in the entire market by a large buy/sell order may eventually be reflected in the open market price. This will cause the pending orders in the dark pool to be unable to be fully executed, that is, the lower the spread is in exchange for the lower execution speed of the order, and the late order maker may have to be forced to adjust the target price or use the price of the worse side in the pending order range As for the transaction, whether the final average transaction price is better than the open market transaction price needs to be marked with a question mark.
2. It should be noted that dark pool orders will slow down the speed at which the market price develops in favor of the maker of the order, and accelerate the speed at which the market develops in a direction unfavorable to the maker of the order. For a speculative trader/fund , the final profit may not necessarily be better.
3. If too many orders enter the dark pool market, the pricing efficiency of the open market may be reduced, and the reference value of the open market price will be reduced. When the open market cannot accurately reflect the impact of external information on the price of digital currency, people have to Carrying out more independent price research and judgment may result in a waste of resources. And the thinning of open market order books could lead to greater market volatility with less money.
4. Whether the operator of the dark pool is subject to supervision, and whether he will take advantage of the customer’s information advantage. If this cannot be guaranteed, the dark pool can only become a tool for the operator to squeeze wool. Currently, the decentralized dark pool trading platform has not yet formed a scale , could not comment on its privacy and fairness.
The Kronos team also expressed their views on this market challenge. He believes that it comes from several aspects: “One is safety, how to ensure the safety of transactions and assets; Mature regulation, but digital currency is not, which is not conducive to the expansion of the dark pool market. There is also the challenge of the entire cryptocurrency market. The current market is still small. We have seen the recent decline in the overall market trading volume, and the trading sentiment is not high. , we want to expand this market through our work, so that we can trade larger volumes and obtain more liquidity for our quantitative strategies.”
