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A Hard Look Into Noticeable Cross-Exchange Inefficiencies [freebie inside]

by Jarett DunnApril 26th, 2020

Too Long; Didn't Read

A bigger movement on a spot exchange easily translates into a radical move on the exchanges that match and mirror cash’s behavior, like perpetual swaps and futures. The inefficiencies in price can (and have been) taken advantage of, both inside a single exchange and by combining exchanges. There are as many as 5-7 opportunities at DOUBLE the cost in fees at 2-3-7 or even break break-ups. The big guys haven’t cornered every opportunity in crypto, yet!

featured image - A Hard Look Into Noticeable Cross-Exchange Inefficiencies [freebie inside]

Price action tends to happen where people are planning to keep the crypto they buy. A bigger movement on a spot exchange easily translates into a much more radical move on the exchanges that match and mirror cash’s behavior, like perpetual swaps and futures.

The inefficiencies in price can (and have been) taken advantage of, both inside a single exchange and by combining exchanges. It’s like buying 10 apples downtown for a dollar, walking uptown and selling those same apples for $2 – that’s $1 in your pocket as pure arbitrage!

Derivatives

When exchanges offer derivatives, or trading products who somehow derive their value from an underlying asset, all sorts of new worlds open and opportunities arise.

While futures, options and other kinds of derivatives in traditional markets are conquered by quant trading funds with both the wherewithal and capital to dominate any inefficiency in moments – the opportunities last a fair deal longer in crypto.

This is an aside, but DeFi leader Compound.io has a ‘liquidation’ mechanism for loans that devalue against the asset they borrowed and would risk bankruptcy except that other Compound uses can opt to pay back a part of the debt and in return they receive some of the collateral at a discount.

The long and short of it is that a year or two ago some loans in ETH totaling a few millions of dollars went up for liquidation and every single automated liquidator in that ecosystem had a piece and there was some left over – meaning that the big guys haven’t cornered every opportunity in crypto, yet!

Here, have some opensource compound autoliquidator I started writing:

(Gist Link)

Derivatives Pt 2

I should explain that holding a position at any amount of leverage is an opportunity all on it’s own. Let’s say you notice that the aggregate volumes mean you think a bullrun is coming and you’d want to long that trend and hopefully catch 70% of the action.

You do so, exposing $500 instead of the $100 capital you had and by the time the price moves a whole 1% you exit. Instead of gaining $1 without leverage you were able to capture $5… bravo!

(aggr.trade has great aggregate data, I forked their repo once for a bot)

When it comes to being able to figure out the data beyond your gut instincts, if you can find and maintain any edge – even 70% of the time – and successfully repeat that success, then you can do it at increasing levels of leverage until you maximize your yields without risking the chance of liquidation – in a mix according to as you see fit.

Funding

Where it gets interesting is when crypto exchanges define their own brand-spanking new instrument and contract, like they did with Perpetual Futures. This is really the wild wild west of the financial world, and now we can play with all the ins and outs that make these thing tick.

Instead of a traditional futures contract, where the premium affects the price above/below the spot or underlying price and the time until the future expires is the control on the price (as – depending on your methods of settlement) your futures will be settled at present day value on expiry day.

This means that (by and large) futures will converge or move closer to the underlying price. We can measure this by dividing the days left until expiry to see how much buying low and selling high now between futs and perps might allow us to win through what’s known as ‘cash n carry futures arbitrage.’

That was a lot about futures, but the heading indicated perps?

Well, the good news for you is that I just finished a work of art. There’s a whole bunch of different ways to approach how to have a sure-fire way to win when the exchange literally force people holding or shorting crypto to pay a fee to each other (funding…)

I looked at the sheer number of perpetual contracts that Binance and FTX share. I then wrote a short script to check and compare how different their funding rates were – and whether or not buying in one place could mean selling in another and keeping the funding rewards for both directions. Sure enough, you could!

POC’s funding rebates… (note negative means paid to YOU!)

The funding rates vary but if you apply some math to each and every shared perpetual contract and assuming entry-level maker fees of 2% on each exchange, there are as many as 5-7 opportunities to just break even or 2-3 opportunities at DOUBLE the cost in fees!