Dark pools can reduce large transaction costs and hide the purpose of transactions by hiding transaction execution.
Original title: “What are the advantages of providing liquidity in a dark pool”
Written by: WebX Lab
Dark pools, market makers and liquidity providers are themselves problems under the same category. The following briefly describes the concepts of dark pools and liquidity market makers.
What is a dark pool
The simple definition of a dark pool is anonymous and not publicly presenting transaction execution liquidity, which refers to some non-public trading markets. Investors who trade in the open market cannot know what is going on in the dark pool. Therefore, the dark pool trading mode is dark, and the transparency of the transaction depth of order book transactions in the market means it is clear.
Although the term dark pool is more threatening, it provides a series of (large liquidity provision, transaction cost reduction, hidden transaction purpose, etc.) for traders, investors, and brokers, which has a very benign effect on the financial trading market.
The original purpose of dark pool trading
Dark pools emerged in the United States and mainly used to hide large-value trading orders. As it is more difficult to execute large-value trading orders in the regular market, large orders are easily seen by competitive traders through order splitting, and undivided orders are easier It was discovered that it was extremely difficult to trade large orders, and the situation of wool and copying was serious. The dark pool used a secret transaction (the order was not disclosed before the order was fully completed) so that large traders did not need to disclose their trading trajectory in advance to achieve The purpose of hiding one’s own transaction purpose and reducing transaction cost.
Dark Pool Trading in Digital Currency (WOOTRADE)
WOOTRADE is a dark pool trading platform incubated by Kronos Research. It provides trading liquidity for users such as trading platforms, wallets, etc. at a zero handling fee, and encourages the market-making team to provide the best market quotation at any time. According to the official introduction, at present, thanks to the Kronos Research team behind it, WOOTRADE can provide a transaction depth of more than 100 BTC at a spread of 0.2%, without charging customers any handling fees or service fees.
Trading platforms and DEXs can obtain orders from WOOTRADE at zero cost, thereby increasing liquidity. The main nodes also enjoy the revenue share to achieve the flow demand. For the trading platform, providing liquidity without handling fees can reduce the transaction cost of the platform, and at the same time allow the platform to have the conditions for trading users to reduce the procedures to attract new users and increase the transaction frequency of new and old users.
Simply put, it is based on wootrade’s order routing mechanism, which not only completes the order matching in the market, but also provides stronger transaction depth and benefits with high-frequency trading strategies, so that WOOTRADE can provide transactions at a price with zero handling fees. fluidity.
For users, the trading platform used reduces slippage and spreads and increases market depth when handling fees may be reduced, which undoubtedly improves trading experience and efficiency.
The difference between bright pool, gray pool and dark pool for traders
Dark pool trading mode, for all traders, only the market price can be referred to, that is, the relative fairness of the transaction has been achieved, but whether the secret information is the same for all traders is the biggest risk of the dark pool trading mode (Does not disclose whether there is a tiered market risk, etc.).
Comparing bright pool and dark pool trading modes, a real bright pool means that anyone in the market can freely obtain all tradable quantity and market depth and other information, including the transparency of market information and the openness of transaction information (Know who wants to buy in the market, where and how to buy it).
The trading model in the gray pool market is difficult or impossible to achieve complete bright pool trading. The information in the market is only relatively open and transparent. Dark pool trading is also difficult to make a complete dark pool. It is also only for any trader. Transaction prices and simple in-depth reference. That is, the system made in the market can still be attributed to the gray pool, that is, the transaction information in the market can only be relatively fair, and the biggest attraction to traders is stability and optimization of transaction costs.
Matchmaking transaction and market maker model is better or worse
Matchmaking transaction (order book)
Matchmaking transaction system is an order-driven system in which buyers and sellers submit purchase and sale orders, and the order price is aggregated and matched by the matching system to complete the transaction. In the matchmaking system, transaction orders are ordered according to price priority and time priority. . The price is formed by both buyers and sellers, so the market determines the price without being manipulated by some people or institutions. However, since the buyers and sellers must reach an agreement to trade, this will make it difficult for market transactions, especially when the market is light. At that time, it may lead to no transaction, that is, the liquidity of the market becomes weaker. No third party is involved, so the main transaction cost is only the commission fee of the matching system, and the transaction cost is relatively low.
Market maker model (discreet)
The market maker system, that is, the quotation-driven system, the specific process is: the market maker establishes and adjusts the market-making market model and gives reasonable buying and selling prices, and then accepts the buy and sell orders at the quoted position, namely When an investor issues a buy order, the market maker sells with its own funds, when an investor issues a sell instruction, the market maker uses its own funds to buy, and an investor issues a buy instruction with inventory to execute the sale. If the inventory is insufficient , Then buy from other market makers, and finally adjust the two-way quotation of the market maker according to the market. The entire process can effectively stabilize the market and increase market liquidity. However, if the number of market makers for certain varieties is relatively small, market makers can easily rely on their own capital and information advantages to make bets against customers and manipulate prices. The market maker participates in the quotation and acts as the counterparty to everyone.
It is risky to undertake market-making obligations and invest your own funds. The market maker will require compensation for the services it provides and the risks it assumes to obtain income. The source of profit is the difference between the buying and selling prices.
In general, matchmaking transactions are more biased towards bright pool trading, the market order book is open, and the market maker model is more biased towards dark pool trading, trading in a quotation-driven model, and the difference between orders and depth is open to traders. Compared with matchmaking transactions, the market maker model solves the problem of liquidity exhaustion when market conditions are sluggish or unilateral markets appear.
Several dimensions of liquidity and market depth
Immediacy (Immediacy) refers to how fast a deal can be made for a given quantity and price.
Immediacy refers to the time it takes to match the right purchases together each time. The faster the transaction, the easier the transaction and the better the liquidity.
Width refers to how low the price can be traded for a given time limit and quantity.
Width refers to the range of tradable prices in the market. The larger the range, the easier the transaction and the better the liquidity.
Depth refers to how much quantity can be traded for a given time limit and price.
Depth refers to the total amount of tradable objects in the market. The more tradable quantities at the same price, the better the liquidity.
Diversity refers to whether there are multiple trading strategies in the same target.
Diversity refers to whether the strategies that want to buy or sell at the same time in the market adopt different strategies, rather than a transaction run, that is, all orders at the same time are buying or selling.
Resiliency refers to how long it takes to recover after market orders are cleared.
Recoverability refers to how long it takes for the market to restore the original order depth after the unilateral order is cleared by the excess order.
The role of providing liquidity to the market is the market maker
The concept, source of profit and technical barriers of liquidity market makers
Market making is not the exclusive right of an institution. Anyone can become a market maker. This is the most important concept of liquidity mining with DeFi. Everyone provides liquidity for the market, that is, everyone is The role of market maker in the market, but the concept of overall liquidity mining is not long-lasting, because market makers have higher market-making risks and only make up for market-making costs through high mining yields. When the mining revenue is not enough to cover the cost of market making, no one wants to continue (the nature of profit-driven).
The profitability of participation in liquidity mining is one of the traditional profitability of market makers, that is, to provide liquidity for the market. Exchanges give liquidity providers some subsidies (service fees), and the main source of profit is Intermediate spread, that is, the trading spread in market transactions, the difference between the buy price and the sell price that a trader sees when trading, or the buy price and the buy price seen in a market maker model exchange The difference between the selling price, for example, if you want to trade BTC, the current market price is 13000, the buying price is 13001, and the selling price is 12999. The two points in the middle are the profit of the market maker’s spread.
Another profit method is fee discounts. As a market maker, you need to provide more transaction liquidity than traders, that is, to conduct more transactions in the market, and the fee rate is more critical, although there are no procedures. Fee discounts can also be used for market making, but the lower or the direct return of the commission, the greater the operating space of the market maker. Most high-frequency transactions are based on extremely low or zero commissions.
The most critical technical barrier for market makers is quantification. Market making and quantification itself are integrated. A good market maker must involve quantification, hedging, high frequency, risk control, etc. If you continue to talk about this topic, you can talk about it. Many, but not a very important range of knowledge for trading participants.
Whether it’s dark pools or market makers, these names may not be good in everyone’s impression, but they are an indispensable part of the financial system, not just centralized exchanges (CEX) and decentralized exchanges (DEX). ) Provide liquidity and perform liquidity aggregation, and also reduce transaction costs (handling fees, spreads, etc.) for traders. Even if the model deviates from the essence of decentralization, it provides real value to the market.
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