Cross-exchange liquidity mirroring is a market making strategy that allows market makers to take advantage of price differences across exchanges by mirroring liquidity from one exchange to the next. This is done by placing limit orders on a less liquid exchange, and then hedging any filled trades on a more liquid exchange.
The goal of cross-exchange liquidity mirroring is to profit
from the spread between the prices of an asset on different exchanges. For
example, if the price of Bitcoin is $10,000 on Exchange A and $10,100 on
Exchange B, a market maker could place a limit order to buy Bitcoin on Exchange
A for $10,000 and then a market order to sell Bitcoin on Exchange B for
$10,100. If the limit order is filled, the market maker will make a profit of
$100.
Cross-exchange liquidity mirroring can be a profitable
strategy, but it is important to note that it is also a risky strategy. The
prices of assets can fluctuate rapidly, and if the market maker misjudges the
market, they could lose money. Additionally, cross-exchange liquidity mirroring
requires a deep understanding of the different exchanges and their respective
order books.
Here are some of the benefits of cross-exchange liquidity
mirroring:
It can be a profitable strategy, especially in volatile
markets.
It can help to improve liquidity on less liquid exchanges.
It can help to reduce arbitrage opportunities.
Here are some of the risks of cross-exchange liquidity
mirroring:
The prices of assets can fluctuate rapidly, which can lead
to losses.
It requires a deep understanding of the different exchanges
and their respective order books.
It can be a complex and time-consuming strategy to
implement.
Overall, cross-exchange liquidity mirroring is a risky but
potentially profitable market making strategy. It is important to carefully
consider the risks and benefits before implementing this strategy.
Here are some of the tools and platforms that can be used
for cross-exchange liquidity mirroring:
Hummingbot
3Commas
Pionex
Coinrule
Cryptohopper
These platforms allow users to automate the process of
placing limit orders and hedging trades across multiple exchanges. This can
help to reduce the risk of human error and improve the profitability of the
strategy.
What is the reference price for market making?
The reference price for market making is the price that is
used as a benchmark for determining the bid and ask prices that a market maker
quotes. It is typically the average of the last bid and ask prices, or the
closing price of the asset on the previous day.
The reference price is important for market makers because
it helps them to minimize their risk. By quoting prices around the reference
price, market makers can be more confident that they will be able to find
buyers and sellers for their orders.
The reference price can also be used by other market
participants, such as traders and investors, to get an idea of the current
market value of an asset.
The reference price for market making can be determined in a
variety of ways, depending on the asset and the exchange. Some common methods
include:
The average of the last bid and ask prices
The closing price of the asset on the previous day
The VWAP (volume-weighted average price) of the asset over a
certain period of time
The midpoint of the bid-ask spread
The specific method used to determine the reference price
will vary depending on the exchange's rules and regulations.
Here are some of the factors that can affect the reference
price:
The volume of trading in the asset
The volatility of the asset
The liquidity of the asset
The time of day
The news and events that are affecting the asset
The reference price is a dynamic and constantly changing
metric. It is important for market makers to monitor the reference price
closely and adjust their quotes accordingly.
How does Hummingbot make a market?
Hummingbot is an open-source software platform that allows
users to automate market making strategies on cryptocurrency exchanges. It can
be used to make a market in a variety of ways, including:
Order book market making: This is the most basic form of
market making, and it involves placing limit orders on both the bid and ask
sides of the order book. Hummingbot can be configured to place orders at a
variety of prices, depending on the desired market making strategy.
Volume-weighted average price (VWAP) market making: This
strategy involves placing orders at the VWAP of the asset over a certain period
of time. The VWAP is the average price at which an asset has been traded over a
period of time, and it is a good way to ensure that the market maker is not
exposed to too much risk.
Grid trading: This strategy involves placing a series of
limit orders at predetermined price levels. Hummingbot can be configured to
place orders at a variety of price levels, depending on the desired market
making strategy.
Hedged market making: This strategy involves using a
combination of limit orders and stop-loss orders to protect the market maker
from losses. Hummingbot can be configured to use a variety of hedging
strategies, depending on the desired risk tolerance.
Hummingbot also supports a number of other market making
strategies, such as TWAP market making, TWAP-based order book market making,
and hidden order market making.
The specific market making strategy that is used will depend
on a number of factors, such as the asset being traded, the volatility of the
market, and the amount of risk that the user is willing to take.
Hummingbot is a powerful tool that can be used to make a
market in a variety of ways. However, it is important to note that market
making is a risky activity, and it is important to carefully consider the risks
and rewards before using Hummingbot.
Here are some of the benefits of using Hummingbot to make
a market:
It is an open-source platform, so it is free to use.
It is very flexible and can be used to implement a variety
of market making strategies.
It is easy to use and can be set up quickly.
It is constantly being updated and improved by the
Hummingbot community.