Cross Exchange Market Making
Cross-exchange market making is a trading strategy where a trader or algorithm simultaneously buys and sells assets on two or more different exchanges, aiming to profit from the price discrepancies between those exchanges. The goal is to capitalize on the spread—the difference in the price of the same asset on different platforms—while keeping the overall position neutral by balancing buy and sell orders.
Here's how it typically works:
Steps Involved:
Identify Price Discrepancies: A trader identifies a price difference between the same asset on two exchanges. For example, Bitcoin might be trading at $30,000 on Rysk DEX and $30,020 on Vertex.
Place Buy and Sell Orders: The trader buys the asset on the exchange where the price is lower (Rysk DEX, at $30,000) and simultaneously sells it on the exchange where the price is higher (Vertex, at $30,020).
Lock in the Spread: By executing these trades simultaneously, the trader locks in the $20 difference (spread). After accounting for trading fees and any other associated costs, the goal is to have a profit.
Neutralize Inventory Risk: To avoid holding any long or short positions in the asset (which would expose the trader to price risk), the trader continuously repeats the process, adjusting the size and timing of trades to keep the exposure neutral across exchanges.
Arbitrage Execution: Cross-exchange market making works best when the trader can execute the trades very quickly, typically using automated algorithms. Speed is important to minimize slippage and ensure that the price discrepancy persists during execution.
Example Scenario:
Imagine there's a price discrepancy in Bitcoin on two exchanges:
RYSK DEX: BTC is priced at $30,000.
VERTEX: BTC is priced at $30,020.
A cross-exchange market maker would:
Buy 1 BTC on RYSK DEX at $30,000.
Sell 1 BTC on VERTEX at $30,020.
The spread is $20. If the trading fees on both exchanges combined are less than $20, the trader pockets the difference as profit.
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