14 Mar 2022
2 min read
Price discovery happens in Asia
We've recently moved our exchange servers to Tokyo. While this sounds like a boring technical task with no relevance, it makes a huge difference to traders using the exchange for a number of reasons, is a key part of our commitment to offer excellent liquidity and world leading performance for all our customers. To find out why, we'll delve into the dark depths of algorithmic trading and market making.
Market makers are the bedrock of every exchange. Their job is to provide liquidity for other traders to take. Their objective is still to make money and they do this by trading the spread, the difference between the best bid and best ask prices. They aim to sell 1 contract for every contract that they buy, and pocket the tiny differences in the price.
Price discovery is critical to make this strategy work. Price discovery is the process by which they determine a fair price for the asset, i.e. a way of answering the question "what is the real price of bitcoin right now". If the price is too high then smart traders will arbitrage - buy high on one exchange, and sell low on another, and they end up making a loss.
So they look at prices on a variety of different exchanges in real time to calculate what the price is now. This calculation is done very frequently. The faster they get that data, the more accurate the price. If they have confidence in that the price they have calculated is up to date, then they can respond to changes faster and hedge positions faster - their risk is less. This means they can quote deeper liquidity and reduce the spread without risking their profitability.
So how does the migration to Tokyo fit in to all this? Well, we have moved all our servers into AWS region
ap-northeast-1, which, "coincidentally" is where many of the other big exchanges are based. Being co-located with all the other major exchanges means that market makers or other traders that run their algos out of Tokyo benefit from reduced latency - i.e. their algos get price data much quicker. That means, over time, more liquidity, lower spreads for Globe traders. Other algo traders will also benefit from this Everybody wins!
The move has given us an opportunity to make architectural improvements based on data we've collected over the past 9 months of running. We now have much lower internal network latency, meaning the time between the web servers and the core exchange is much lower - so our already market leading speed should be even faster.
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23 Mar 2022
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