Skip to content

Latest commit

 

History

History
259 lines (135 loc) · 24.1 KB

MANUAL.md

File metadata and controls

259 lines (135 loc) · 24.1 KB
Raw

What is Market Making?

Market making is a trading strategy where the trader simultaneously places both buy and sell orders in an attempt to profit from the bid-ask spread. Market makers stand ready to both buy and sell from other traders, thus providing liquidity to the market.

The strategy is appealing to traders because it doesn't require traders to take a directional view of the market - there's money to be made when the market goes up and when the market goes down. It's also heavily incentivized by exchanges looking for liquidity and volume - many exchange operators will pay you to make markets on their exchanges.

An example

Let's consider a simplified market. Let's say there are three traders: Alice, Bob, and Tim. Alice is looking to sell some of her Bitcoins and Bob is looking to convert some of his USD into Bitcoin. Neither one are savvy about markets or cryptocurrency - they use Bitcoin, but aren't going to lose sleep over trying to get the absolute best prices. Tim is operating Krypto-trading-bot. Now lets say that the price BTC to USD is $100. Tim could configure Krypto-trading-bot to send in a buy order for 1 BTC at $95 and a sell order for 1 BTC at $105. Tim would hope that Bob would come along and buy the offered sell order at $105 and Alice would come and sell BTC at $95 - netting Tim $10.

But what if that doesn't happen? What if the price of BTC/USD jumps to $103? Now Tim's buy order seems really uncompetitive at $95 - Alice doesn't want to sell for that little. And Bob could get a pretty good deal by getting the BTC at only two extra dollars. To prevent this scenario, Tim's Krypto-trading-bot would readjust the orders by cancelling the $95-$105 orders and placing a new set of orders - also known as making a market - at $98-$108.

Like in any market these days, Bob and Alice probably aren't humans clicking buttons. They certainly aren't humans shouting on a floor in lower Manhattan. More likely, they are also computerized algorithms capable of placing orders in milliseconds. To survive as a market maker, you need to be faster than those algorithms to make a profit.

So, how does Krypto-trading-bot work?

As previously mentioned, market making is really the art of figuring out the price of something, then making a market around that price. So how do we know what is the real price of Bitcoin? Well... we don't. And of course the price of Bitcoin now might be radically different than the price in a day, in an hour, or even in a second from now. The best we can do is to build an estimate, or fair value, of the price of Bitcoin. In Krypto-trading-bot, we consume the market data from the exchange we are sending orders into as a starting point. That includes the best bids and offers and most recent trades (aka market trades) by other participants in the market.

From our fair value, we then need to make a market around that price. Back to our hypothetical example with Bob and Alice: we could make our market as $95-$105, we could have also made it $99.99-$101.01, or we could have also done $47-$332.21. So how do we decide? That's where the quoting parameters come into play. Those parameters dictate how wide of a market to make (wide=askPrice-bidPrice) and what size we want our quotes in the market to be. The procedure for coming up with profitable parameters is both an art and a science - there is no one size fits all formula.

When Krypto-trading-bot figures out a suitable market, Krypto-trading-bot will then send in the buy and sell orders. Hopefully it's able to buy for less then sell for more, and repeat many times per day. Sometimes that's not always the case - sometimes there are genuinely more buyers than sellers for the prices you are setting. Often this comes when the market is moving very fast in one direction. Luckily, Krypto-trading-bot will prevent you from selling too fast without finding corresponding buyers and will stop sending orders in the imbalanced side.

How do I see what's going on?

Navigate to the Web UI as described in the install process. You should see a screen like:

  • Market Data and Quotes - this is perhaps the most important screen in the app.

    • The top row in blue with "q" is the quote that you generate via the Quoting Parameters supplied. If the text is grey, the generated quotes are not in the market, and green when they are.

    • "FV" is the fair value price calculated by Krypto-trading-bot as the starting point for the generated quote.

    • The "mkt" rows are the best bids and offers on the exchange you are connected to.

  • Trades - Trades done by your exchange account. "side" is the side which your order was sent as. "val" is the total value of the trade, which is price * size +/- total exchange fee

  • Market Trades - Trades done by all participants in the market. "ms" is the side that was the make side (provided liquidity). The columns starting with "q" are your quotes at the time of the trade, the columns starting with "m" are the best bid and offer information at the time of the trade.

  • Quoting Parameters - All of the parameters needed to generate a quote. See the section "How do I control Krypto-trading-bot' quotes?" for each field's description.

  • Positions - Shows holdings of each currency pair you are using.

  • Order List - Shows order statuses of each order sent to the exchange.

    • "Cxl" - clicking the red button will attempt to cancel the order.

How do I control Krypto-trading-bot' quotes?

In the web UI, there are three rows of panels with cryptic looking names and editable textboxes. Those are the quoting parameters, the knobs which we can turn to affect how Krypto-trading-bot will trade.

  • % - If enabled, the values of bidSize, askSize, tbp, pDiv and range will be a percentage related to the total funds (available + held in both sides); useful when the very same funds are used in multiple markets, so the quantity of the funds is highly variable, then may be useful to work with percentages.

  • mode - Sets the quoting mode

    • Join - Sets our quote to be at the best bid and the best offered price, If the BBO is narrower than width, set our bid quote at FV - width / 2 and ask quote at FV + width / 2.

    • Top - Same as Join, but if the code can better the best bid or offer by a penny while respecting the width, set that as the quote so we will then be at the top of the market.

    • Mid - Set our bid quote at FV - width / 2 and ask quote at FV + width / 2

    • Inverse Join - Set the quote at the BBO if the BBO is narrower than width, otherwise make the quote so wide that no one will trade with it.

    • Inverse Top - Same as Inverse Join but make our orders jump to the very top of the order book.

    • HamelinRat - Follow the Colossus of the market. Unlike other modes, it does not calculate the quote spread based on fair value, instead it looks for the biggest order in the market levels and places the quote right before it.

    • Depth - Use width as depth. Unlike other modes, it does not calculate the quote spread based on fair value, instead it walks over all current open orders in the book and places the quote right after depth quantity, at both sides.

  • safety- Sets a quoting Safety

    • PingPong - Always respect the calculated widthPong from the last sold or bought size, if any.

    • PingPoing - Same as PingPong but do not respect always the widthPong to make new Pong trades, instead if the fair value has moved in a opposite widthPong direction, Ping trades will be restarted with 0 price as safety. For example if last buy was at 100 and withpong is 10, last buy safety will be ignored/restarted if price becomes 90.

    • Boomerang - Same as PingPong but the calculated widthPong for new Pongs is based on any best matching (using pongAt) previous sold or bought size, if any.

    • AK-47 - Same as Boomerang but allows multiple orders at the same time in both sides. To avoid old trades, on every new trade Krypto-trading-bot will cancel all previous trades if those are worst.

      • bullets - Maximum amount of trades placed in each side (only affects AK-47).

      • range - Minimum width between bullets in USD (ex. a value of .3 is 30 cents; only affects AK-47).

  • pingAt (Pongs are always placed in both sides, only affects PingPong, Boomerang and AK-47)

    • BothSides - Place new Pings in both sides.

    • BidSide - Place new Pings only in Bid side, and therefore in Ask side only Pongs will be placed.

    • AskSide - Place new Pings only in Ask side, and therefore in Bid side only Pongs will be placed.

    • DepletedSide - Place new Pings only in the opposite side with not enough funds to continue trading.

    • DepletedBidSide - Place new Pings only in the Ask side if there are not enough funds to continue trading in the Bid side.

    • DepletedAskSide - Place new Pings only in the Bid side if there are not enough funds to continue trading in the Ask side.

    • StopPings - Only place new Pongs based on the history of Pings, without placing new Pings.

  • pongAt (only affects Boomerang and AK-47)

    • ShortPingFair - Place new Pongs based on the lowest margin Ping in history respecting the widthPong from the fair value.

    • LongPingFair - Place new Pongs based on the highest margin Ping in history respecting the widthPong from the fair value.

    • ShortPingAggresive - Place new Pongs based on the lowest margin Ping in history without respecting the widthPong from the fair value.

    • LongPingAggresive - Place new Pongs based on the highest margin Ping in history without respecting the widthPong from the fair value.

  • bw? - Enable Best Width to place orders avoiding "hollows" in the book, while accomodating new orders right near to existent orders in the book, without leaving "hollows" in between.

  • bwSize - If Best Width is enabled, set the total size of trades in the book to ignore. Set to 0 to only ignore "hollows". Useful for ignoring very small trades in the book.

  • %w? - If enabled, the values of width or widthPing and widthPong will be a percentage related to the fair value; useful when calculating profits subtracting exchange's fees (that usually are percentages too).

  • width and widthPing - Minimum width (spread) of our quote in USD (ex. a value of .3 is 30 cents). With the exception for when apr is checked and the system is aggressively rebalancing positions after they get out of whack, width will always be respected.

  • widthPong - Minimum width (spread) of our quote in USD (ex. a value of .3 is 30 cents). Used only if previous Pings exists in the opposite side.

  • orderPctTot - If % is enabled, specify the method for calculation of bidSize and askSize as percentages.

    • Value - Percentage is taken of the total funds (available funds + held in both sides). For example, if 20% is set, and the total funds is $100, then the maximum bid size is $20. This has a similar effect as to non-percentage-based sizes, but allows for bid sizes to adjust to funds quantity.

    • Side - Percentage is taken of funds only on one side. For example, if 20% is set, and quote funds are worth 20$, and base funds are worth $80, then buys will placed for 4$ and sells will placed for $16. This allows trading to continue even when funds on one side are heavily depleted, but results in held balances trending towards being evenly distributed.

    • TBPValue - Percentage is taken of the total funds as in Value, but either the sell size or buy size is shrunk proportional to the value of the TBP, such that the balances will move towards being bought or sold depending on which side the TBP is.

    • TBPSide - Percentage is taken of funds only on one side as in Side, but balance is taken relative to the pDiv extents such that they are not crossed, and either the sell size or buy size is shrunk proportional to the distance from the TBP, such that balances will tend to migrate towards the TBP.

      • exp - If TBPSide is used for orderPctTot, this specifies the exponent to raise the size multipliers by. The higher the number, the more the sizes will shrink as balance passes the TBP.

  • bidSize - Maximum bid size of our quote in BTC (ex. a value of 1.5 is 1.5 bitcoins). If % is enabled, then this is the maximum bid size as a % as specified in orderPctTot. With the exception for when apr is checked and the system is aggressively rebalancing positions after they get out of whack.

  • askSize - Maximum ask size of our quote in BTC (ex. a value of 1.5 is 1.5 bitcoins). If % is enabled, then this is the maximum ask size as a % as specified by orderPctTot. With the exception for when apr is checked and the system is aggressively rebalancing positions after they get out of whack.

  • maxBidSize? and maxAskSize? - Use bidSize and askSize as minimums and automatically find the maximum possible size based on the current "Target Base Position" (just as having enabled apr on Size but even before your position diverges more than pDiv).

  • fv - Sets the fair value calculation mode

    • BBO - FV = ([topBid price] + [topAsk price]) / 2.0

    • wBBO - FV = ([topBid price]*[topBid size] + [topAsk price]*[topAsk size]) / ([topAsk size] + [topBid size])

    • rwBBO - FV = ([topBid price]*[topAsk size] + [topAsk price]*[topBid size]) / ([topAsk size] + [topBid size])

  • apMode

    • Manual - Krypto-trading-bot will not try to automatically manage positions, instead you will need to manually set tbp.

    • EWMA_LS - Krypto-trading-bot will use a long minute and short minute exponential weighted moving average calculation to buy up BTC when the short minute line crosses over the long minute line, and sell BTC when the reverse happens. The EWMA values are currently exposed in the stats.

    • EWMA_LMS - Krypto-trading-bot will use a long minute, medium minute and short minute exponential weighted moving average calculation, together with the simple moving average of the last 3 fair value values, to buy up BTC when the short minute line crosses over the long minute line, and sell BTC when the reverse happens.

    • EWMA_4 - Krypto-trading-bot will use a medium minute and small minute EWMA calculation to buy when the small minute line crosses over the medium minute line, and sell when the reverse happens. Additionally sets the tbp to 0% if the verylong EWMA minute line crosses over the long EWMA minute line.

    • short - Used when apMode is EWMA_LS, EWMA_LMS or EWMA_4. Sets the periods of EWMA Short to automatically manage positions.

    • medium - Only used when apMode is EWMA_LMS or EWMA_4. Sets the periods of EWMA Medium to automatically manage positions.

    • long - Used when apMode is EWMA_LS, EWMA_LMS or EWMA_4. Sets the periods of EWMA Long to automatically manage positions.

    • verylong - Only used when apMode is EWMA_4. Sets the periods of EWMA VeryLong to automatically manage positions.

  • sensibility - Threshold removed from each period, affects EWMA Long, Medium and Short. The decimal value of sensibility must be betweem 0 and 1.

  • tbp - Only used when apMode is Manual. Sets a static "Target Base Position" for Krypto-trading-bot to stay near. In manual position mode, Krypto-trading-bot will still try to respect pDiv and not make your position fluctuate by more than that value. So if you have 10 BTC to trade, set tbp = 3, set apMode = Manual, and pDiv = 1, your holding of BTC will never be less than 2 or greater than 4.

  • pDivMode - Only used when apMode is not Manual mode. Sets the strategy of dynamically adjusting the pDiv depending on the divergence from 50% of Base Value.

    • Manual - No dynamic adjusting of pDiv.

    • Linear - Linear calculation between pDiv and pDivMin.

    • Sine - Calculation between pDiv and pDivMin on a sine curve.

    • SQRT - Square root calculation between pDiv and pDivMin.

    • Switch - If tbp is more than 90% or less than 10%, pDivMin is taken, otherwhise pDiv.

  • pDiv - If your "Target Base Position" diverges more from this value, Krypto-trading-bot will stop sending orders to stop too much directional trading. So if you have 10 BTC to trade, "Target Base Position" is reporting 5, and pDiv is set to 3, your holding of BTC will never be less than 2 or greater than 8.

  • pDivMin - Only used when pDivMode is not Manual. It defines the minimal pDiv for the dynamic positon divergence.

  • apr - If you're in a state where Krypto-trading-bot has stopped sending orders because your position has diverged too far from Target Base Position, this setting will much more aggressively try to fix that discrepancy by placing orders much larger than size and at prices much more aggressive than width normally allows (see pongAt option). It's a bit risky to use this setting.

    • Off - Krypto-trading-bot will not try to aggressively try to stabilize the target based position.

    • Size - Krypto-trading-bot will aggressively make use of bigger size values (x3 size or half of the diverged target base position, whatever is smaller).

    • SizeWidth - Same as Size but also will aggressively make use of smaller width values (respecting always aggressive pongAt option and widthPong).

  • aprFactor - Defines the value with which the size is multiplicated when apr is in functional state.

  • sop - Super opportunities, if enabled and if the market width is sopWidth times bigger than the width set, it multiplies sopTrades to trades and/or sopSize to size, in both sides at the same time.

  • sopWidth - Is the value with the market width is multiplicated to define the activation point for Super opportunities.

  • sopTrades - Multiplicates trades to rise the possible Trades per Minute if sop is in Trades or tradesSize state.

  • sopSize - Multiplicates width if sop is in Size or tradesSize state.

  • trades - Often, only buying or selling many times in a short timeframe indicates that there is going to be a price swing. trades and /sec are used to limitate ping trades: If you successfully complete more orders than trades in /sec seconds, the bot will stop sending more buy orders until either /sec seconds has passed, or you have sold enough at a higher cost to make all those buy orders profitable. The number of trades is reported by side in the UI; "BuyTS", "SellTS", and "TotTS". If "BuyTS" goes above trades, the bot will stop sending buy orders, and the same for sells. For example, if trades is 2 and /sec is 1800 (half an hour):

Time Side Price Size BuyTS SellTS Notes
12:00:01 Buy 10 1 1 0
12:00:02 Buy 10 0.5 1.5 0 Partial fills of size get counted fractionally
12:00:03 Sell 11 0.75 0.75 0 Sell for more decrements the imbalance
12:00:05 Sell 5 0.75 0.75 0 Sell for less than the other buys doesn't help
12:00:06 Buy 10 0.5 1.75 0
12:00:07 Buy 10 0.5 2.75 0 Stop sending buy orders until 12:30:07!

  • /sec - see trades.

  • ewmaPrice? - Use a quote protection of periods smoothed line of the fair value to limit the price while sending new orders.

  • ewmaWidth? - Use a quote protection of periods smoothed line of the width (between the top bid and the top ask) to limit the widthPing while sending new orders.

  • periodsᵉʷᵐᵃ - Maximum amount of values collected in the sequences used to calculate the ewmaPrice? and ewmaWidth? quote protection. After collect sequentially every 1 minute the value of the fair value, and before place new orders, a limit will be always applied to the new orders price using a ewma calculation, taking into account only the last periods periods in each sequence.

  • ewmaTrend? - Use a trend protection of double periods (Ultra+Micro) smoothed lines of the price to limit uptrend sells and downtrend buys.

  • threshold - When trend stregth is above positive threshold value bot stops selling, when strength below negative threshold value bot stops buying.

  • ultra - Time in minutes to define Ultra EMA

  • micro - Time in minutes to define Micro EMA

  • stdev

    • Off - Do not limit the price of new orders.

    • OnFV - Use a quote protection of STDEV, calculated from a sequence of fair value values during periods periods of 1 second, to limit the price equally on both sides while sending new orders.

    • OnFVAPROff - Same as OnFV when apr is Off or when the system is not aggressively rebalancing positions; otherwise if is rebalancing, is same as Off.

    • OnTops - Use a quote protection STDEV, calculated from a unique sequence of both best bid and best ask values in the market order book during periods * 2 periods of 1 second, to limit the price equally on both sides while sending new orders.

    • OnTopsAPROff - Same as OnTops when apr is Off or when the system is not aggressively rebalancing positions; otherwise if one side is rebalancing, is same as Off for that side.

    • OnTop - Use a quote protection STDEV, calculated from two sequences of the best bid (first sequence) and also of the best ask (second sequence) value in the market order book during periods periods of 1 second, to limit the price independently on each side while sending new orders.

    • OnTopAPROff - Same as OnTop when apr is Off or when the system is not aggressively rebalancing positions; otherwise if one side is rebalancing, is same as Off for that side.

  • periodsˢᵗᵈᶜᵛ - Maximum amount of values collected in the sequences used to calculate the STDEV, each side may have its own STDEV calculation with the same amount of periods. After collect sequentially every 1 second the values of the fair value, last bid and also of the last ask from the market order book, and before place new orders, a limit will be always applied to the new orders price using a calculation of the STDEV, taking into account only the last periods periods in each sequence.

  • factor - Multiplier used to increase or decrease the value of the selected stdev calculation, a factor of 1 does effectively nothing.

  • BB? - Enable Bollinger Bands with upper and lower bands calculated from the result of the selected stdev above or below its own moving average of periods.

  • cxl? - Enable a timeout of 5 minutes to cancel all orders that exist as open in the exchange (in case you found yourself with zombie orders in the exchange, because the API integration have bugs or because the connection is interrupted).

  • lifetime - Enable a timeout of lifetime milliseconds to keep orders open (otherwise open orders can be replaced anytime required).

  • profit - Timeframe in hours to calculate the display of Profit (under wallet values) and also interval in hour to remove data points from the Stats, for example a profit of 0.5 will compare the current wallet values and the values from half hour ago to display the +/- % of increment between both and will remove data from the Stats older than half an hour.

  • Kmemory - Timeout in days for Pings (yet unmatched trades) and/or Pongs (K trades) to remain in memory, a value of 0 keeps the history in memory forever; a positive value remove only Pongs after Kmemory days; but a negative value remove both Pings and Pongs after Kmemory days (for example a value of -2 will keep a history of trades no longer than 2 days without matter if Pings are not matched by Pongs; or a value of -0.25 will do so but limited to 6h).

  • delayUI - Relax the display of UI data by delayUI seconds. Set a value of 0 (zero) to display UI data in realtime, but this may penalize the communication with the exchange if you end up sending too much frequent UI data (like in low latency environments with super fast market data updates; at home is OK in realtime because the latency of Krypto-trading-bot with the exchange tends to be higher than the latency of Krypto-trading-bot with your browser).

  • audio? - plays a sound for each new trade (ping-pong modes have 2 sounds for each type of trade).