There is a concern on trading, both in traditional and crypto market (or even any kind of market place):

What if I cannot buy or sell at my intended price and within my investment horizon?…!!

This is one of the key themes in the market, called liquidity and has been sought after by many who want higher profit as well as instant hedging and better risk management. This, needless to say, becomes more serious at the time of a market crash since there should be panic sell but no one wants to buy, so the price drops again and again till reaching the bottom of a water well, yes, liquid point.

In this article, except for measuring the liquidity, we want to see how two markets’ liquidity on the same product can lead to trading profit. With abundant liquidity, a trader may drop his concern on the difference between expected price and executed price. So we experimented with OKEx BTC Quarterly Futures, as known to many, one of the most successful products in the digital asset world and has been emulated by many competitors, almost surely, identical.

Highlights

1. Same products, but not 100% matching on their price movements.

  • Even though index methodology and other conditions may cause slight differences between the two exchanges, there are gaps in the magnitude of price movements and changes.
  • The correlation of two BTC quarterly products was 95%, which is relatively less than expected (99%).

2. Trade profit is in steady growth.

  • Compared to the previous report, with the same algorithmic trading strategy, PnL is growing gradually.
  • Previously, profits jumped at the time of high volatility.
  • With the given period of one month, there was a rocket jump of prices, which means high volume.
  • However, the rate of profit changes is not affected, which brings our attention.

I. Experiment: Statistical Arbitrage Trading Algo

As mentioned before, statistical arbitrage is wildly used and effective strategy implemented by many professionals and active traders, we experiment with the same algo from the previous report. Furthermore, we select Exchange B which is less liquid, and expected some opportunity between OKEx and Exchange B. And tested 5-min based strategy during October.

First, we checked the correlation of two products, expect to see very close to perfect.

  • Despite different exchanges’ product design on the same underlying, maturity, log return of price change is not moving together perfectly.

With the initial investment of 10,000 USDT and a fixed amount of position long and short at each trade, assuming no transaction fees, slippages, we got this result.

Within a month, we ended up with 24% of return on investment, and the profit was growing linearly.

  • However, this entails as many as 1,641 trades, which leads to a mass deduction from profits, due to commissions.
  • The gain per trade is 7.56 USD, so still valid, but not super if we assume trades under the entry fee level of each exchange.

II. Remarks

As given above, this liquid market will mitigate the issue of timely trading and slippage. Previous approach on BSV spot trading entails illiquid situation compared to BTC futures Quarterly. Also, we would like to take into consideration transaction fees by comparing spot to futures, exchange B to OKEx, which became important when the number of trades increased around 80 times. At least, we can see this idea is valuable for steady growth with a high-frequency trading approach, combined with a discounted fee tier level.


Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.


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