HFT & The Deep Structure of Crypto Markets

Published on
April 16th, 2020
52 minutes

HFT & The Deep Structure of Crypto Markets

The Interview ·
Featuring Chris Sullivan and Haim Bodek

Published on: April 16th, 2020 • Duration: 52 minutes

Chris Sullivan and Haim Bodek of Hyperion Decimus join Real Vision's Ash Bennington for a deep dive discussion on market structure, high-frequency trading, and the current state of play in cryptocurrency markets. Sullivan and Bodek begin the interview with an analysis of capital market trading, where they both have extensive experience, and transition into the lessons they now apply in their work in the digital asset space. Filmed on April 13, 2020.



  • cs
    connor s.
    6 May 2020 @ 15:23
    as a silicon valley investor, its refreshing to hear ex-wall 1980s wall st. vets stab at this topic. Its nice because they talk about the financial economics, but lacks the relevant substance around key current events. I don't believe the halving coming up on 5/12/2020 was even mentioned once; this is certainly the most fundamental event re: "the deep structure of crypto markets" a few notes that resonate: - growing crypto horizontally is necessary to get meaningful vertical price movement (170B market cap = 1/10th the size of Apple ... we need more players (i.e. institutional capital) -Price dislocation by venue is a real thing, and part of what makes trading crypro like the Wild West a follow up: Haim never answered: "how large is the cyrpto derivatives market in sum?" -- can we get that answer one day?
  • TR
    Tim R.
    18 April 2020 @ 21:43
    just an idea, if you asked participants to record the audio on their mobile phone, then send it to you after. It takes seconds to sync it up in premiere and you would get 5x better audio quality. I don't mind if people's faces are pixel-ed but it's hard to make out Haim at points
    • AM
      Artem M.
      19 April 2020 @ 21:34
      On that note, it's pretty common for vid conferencing to just call in on the phone and mute the computer mic/speakers. Audio is usually perfect then because it's using the phone network rather than bandwidth available to the machine.
    • cs
      connor s.
      6 May 2020 @ 14:27
      agree tim. good thought
  • JV
    Jan V.
    18 April 2020 @ 08:30
    Ash, maybe a question for next time. I read that physical exchanges are becoming much smaller than the derivatives exchanges (only 10% of total volumes in aggregate). What effect does this have on pricing? What are the risks involved with this trend?
    • IL
      Ian L.
      20 April 2020 @ 11:22
      That's truly interesting- I'd love to see sources on that- blockchain tech writer here, trying to get more into futures related content.
    • JV
      Jan V.
      20 April 2020 @ 20:21
      Hi Ian, found the info here: https://www.coindesk.com/crypto-derivatives-a-corner-of-the-market-or-the-market-itself Personally i am thinking derivates create lots of volatility. But over longer periods of time they don't establish a clear trend in price (up or down). Therefore we still need to look at net flows in the underlying physical market. But i would like to hear what other people are thinking about this.
    • SC
      Sean C.
      20 April 2020 @ 21:59
      Are there any truely physical exchanges? Isn't everything just a derivative? Unless you buy the coin and move it via the Blockchain to your personal wallet the best you have is a paper iou which is itself a derivative.
  • JC
    Jason C.
    20 April 2020 @ 15:12
    can you provide link to the quantlab article they reference?
  • TZ
    Tibor Z.
    18 April 2020 @ 20:27
    OFF TOPIC: RV, it is hard to follow my previous comments and the replies of others. There has to be some notification like on FB or on YouTube! It would be great ! Thank you !
  • MZ
    Mark Z.
    18 April 2020 @ 15:41
    I would rather see KyberNetwork and Uniswap (on-chain liquidity provider) take away these opportunities. Uniswap allows users to contribute to liquidity pools... so that anyone can participate and profits aren't funneled to a select few. see pools.fyi to get an idea of the assets being supported. Not only that, these liquidity networks don't shut down in times of high volatility... during price crashes... just when liquidity is needed the most. Lets be clear that HFT "socialize" the losses and privatize the gains to a handful of people, they are a tax on the growth of blockchain. The problem is that since HFTs are here to exclusively make a living they will be another significant source of selling pressure when they cash out. I am hoping that their appearance on the blockchain landscape in search of greener pastures won't stop blockchain from reaching critical mass...
  • ml
    m l.
    17 April 2020 @ 01:32
    Well real vision has just become a haven for gold bugs and bitcoin “sigh”
    • CT
      Crispim T.
      17 April 2020 @ 12:20
      That's awesome. True value instead of fiat gambling.
    • IO
      Igor O.
      18 April 2020 @ 12:40
      Buy stowks botomz in.
  • PF
    Pablo F.
    16 April 2020 @ 19:49
    Oh my god! How can you be involved in this to this degree and think that no more Bitcoin is going to be created in 2041?! It's 2140! A pretty significant difference.
    • CT
      Crispim T.
      17 April 2020 @ 12:22
      BTC will never surpass 21M. That is 100% known. The consensus rules prevent it and its investors would never agree to change consensus. Even much smaller insignificant changes have been rejected in the past (bigger blocks, etc) - changing the cap would never be accepted. Anyone thinking you "can make more Bitcoin" or "copy it to make other Bitcoin type coins" hasn't been paying attention - and by this time, you really should be paying attention to BTC.
    • CT
      Crispim T.
      18 April 2020 @ 11:42
      Just realized Pablo meant the participant in the video mentioned 2041 as the date where the last coinbase block reward is mined. Yeah, it's not that early, about 100 years after that. Thought you meant the cap would be increased, apologies Pablo.
  • JF
    Jim F.
    17 April 2020 @ 19:20
    Hi guys, this interview was great for the folks who have no exposure to cryptocurrencies. As far as deep structure it barely covered part of the fundementals and about a third was about equities market. You were also asking the wrong questions.
    • AB
      Ash B. | Real Vision
      18 April 2020 @ 05:07
      Jim, What are some of the topics you're most interested in seeing covered in the future?
  • TP
    Timothy P.
    16 April 2020 @ 15:58
    A few points I'd like to expound upon: 1.) "Bitcoin Maximalist" was coined by a Bitcoin competitor, Vitalik Buterin, after his request to increase the potential attack surface of Bitcoin scripts was roundly rejected by consensus. After that rejection, he launched his own token which has had the "achievements" of: a) Demonstrating the fact that implementing full "turing complete" languages has significant security risks -- The DAO "hack" wasn't one -- it was using the contract code exactly as specified which resulted in loss of $70 Million USD at the time. b) Showing how centralized decision making is full of moral hazard -- 13 Ethereum developers including Vitalik decided to "roll back" the chain, essentially exercising control over the entire network without consensus. Less than a few percent of users were aware they could weigh in on the options, and frankly the devs didn't really try to inform them, either. c) Showing that "smart" contracts on Ethereum have limited utility -- The most successful "Dapps" are trivial, most in the gaming/gamblling space. One popular collectible game "CryptoKitties" brought the Ethereum network to a standstill. Other Dapps are languishing because of ETH's lack of scalability. d) Initial Coin Offerings where then enabled by Ethereum, 99% of which were outright scams, with only a few achieving status of using the raised funds for their actual purposes. Most ICO's haven't done anything worth noting, however. Just another capital misallocation debacle. 2.) High Frequency Trading -- This is essentially legal front-running. The only reason that HFT firms are going into the crypto space is because of saturation in the Equities and Forex markets. Having picked the bone clean there, they're moving on like a merry band of locusts to exploit retail flows on smaller exchanges. Generally, I wouldn't have a problem with HFT if they had a level playing field -- much like IEX's latency "speed bump" that makes sure no single firm has an edge on the other. But in the crypto space, this isn't going to happen. I also worry about the lack of liquidity that HFT represents. When the May 6th Flash Crash happened in 2010, deep analysis from Nanex showed that most HFT firms, (if not all) pulled their bots when the market needed liquidity the most. That's the problem with HFT, its a mirage of liquidity that evaporates at the first sign of trouble, leaving the order book stressed and bid/asks blown out wider than they would've been. If HFT in crypto only focused on inter-market arbitrage, I probably wouldn't have a problem with that, but it won't stop there. 3.) "MarketCap" -- Please do some research. I implore anyone on RV to look into tools developed by Coinmetrics, and IntoTheBlock to understand why basic marketcap is a flawed metric for comparison in the crypto space. It takes nothing to create a token, pre-mine issuance to a few billions, and then list on a backwater exchange to claim a large marketcap. 3.) Finally, Proof-of-Stake and Delegated-Proof-of-Stake for passive income may sound like a cheap way to achieve some alpha, but there are inherent risks in staking and depending on networks that have security flaws by using such methods of network security. I'd write more, but then you'd have to pay me. Hope it helps someone.
    • BF
      Billy F.
      16 April 2020 @ 16:39
    • AB
      Ash B. | Real Vision
      16 April 2020 @ 17:20
      Interesting points, Timothy. On Point #1, what do you think of Bitcoin Maximalists adopting the term to proudly describe themselves? It's very interesting to me that what began as something of a slur has become a point of pride in the community.
    • TP
      Timothy P.
      16 April 2020 @ 18:07
      Ash - Some have, no doubt, but I think its more in jest (mostly). In my view, Bitcoin is currently number one, but I watch all the metrics very closely. The moment that I think there's a viable competitor, you better believe I'll start actively moving money around to conform to my new thesis. First-mover advantage is hard to screw up, but I do remain vigilant to ensure that my personal stake is well invested.
    • MT
      Mike T.
      16 April 2020 @ 19:16
      Tim, could you tell us the HFT companies you're alluding to please?
    • AB
      Ash B. | Real Vision
      16 April 2020 @ 19:17
      As you say, first mover advantage is always important — but especially so with the store of value function. I'm really curious to see how BTC Layer 2 solutions play out for things like rapid payment processing and a Turing complete business logic layer. I tend to agree with you: They should remain separate abstraction layers from a security standpoint in bitcoin. One of bitcoin's core strengths is the simplicity & elegance of it model — and it's survive-the-next-nuclear-war level of robustness.
    • FG
      Flavio G.
      16 April 2020 @ 19:29
      When the commenter knows more than the presenter.
    • CT
      Crispim T.
      17 April 2020 @ 12:24
      Excellent post. Proof of Work and BTC are the only sane choice. I wish the market would stop wasting so much time with garbage Rube Goldberg machines like Ethereum.
    • DB
      Debra B.
      18 April 2020 @ 00:20
      I'd love to provide some context to your remarks for RV readers: 1) When you say 'increased attack surface' it can also mean 'increased utility'. No one can argue a computer has a larger attack surface than a calculator, but it is also 10000000x more utility. a) DAO hack. This was an attack on an *application* built on top of the protocol, not the protocol itself. b) The vast majority of the community agreed with the decision because it positively affected a majority of users. Bitcoin has had protocol level bugs which caused a chain roll back that was decided by a select few developers. It was OK because it's in everybody's best interest not to have a broken system. Ref: https://en.bitcoin.it/wiki/Value_overflow_incident c) I'd encourage you to look at the DeFi space. Stable coins are a game changer for utility (and also fits in perfectly with the eurodollar issue often debated here). Check out things like opyn.co you can trade ETH put options now in a decentralized way. d) Initial Coin Offerings - An asset or investment that anyone can subscribe to and receive a receipt of is a game changing use case all on its own. Forget that there are scams (an inevitability on a permissionless platform) imagine being able to subscribe to bonds in this way. It's a game changer for raising capital. No investment bank required. 3) Proof-of-Stake does have its own risks but it also has many benefits. It turns crypto assets into capital assets that are productive and generate return. PoS assets are paid for the service of securing a trust layer for asset settlement. Just like miners in Proof of Work except you don't use all the energy. This also creates a massive supply sink as assets are locked up to stake to secure the network.
  • SV
    Santiago V.
    17 April 2020 @ 15:38
    Loved this interview. These guys are smart sharks playing in shallow waters with whales. A few points of agreement: 1. The digital asset space is highly fragmented lending itself to numerous chronological / market asymmetries that can be arbitraged, well spoken gentlemen. 2. The liquidity in digital asset markets is very low, relatively speaking, lending itself to mass manipulation and price coupling, but you gentlemen know this. Even though retail makes up 70% of the market, most is dormant or not actively traded, meaning the institutional gets the edge on all trades, especially in derivatives. Easy marks. 3. The touched on fungibility of products, what this is really leading up to are liquidity pairings in digital assets apart from a fiat settlement layer. INTEROPERABILITY is the future of digital assets without a doubt. Read more here: https://twitter.com/Santiag78758327/status/1244373373133688839?s=20 4. Sector diversification is the real gem. Everyone who knows little about digital assets talks about Bitcoin but miss the forest for the trees. DLT / blockchain will unleash the value of the world via tokenization, interoperability, and fungibility of value without a reserve currency. 5. The recent market selloffs was an excellent stress test of the various global digital asset exchanges to route order flows and should be promoted widely. Well show cased. 6. The STO market has the potential to be massive precisely because it offers the promise of disintermediating alot of middle men in the capital markets. On the clearing and settlement layer I'm confident that the DTCC will try and squash the space with regulations as soon it becomes or threat or try to "buy" out the biggest players, like Securitize / Templum. By then the international STO market will be uncontrollable and it will be too late. This is the long game, when capital becomes free! Some areas of disagreement: 1. Layer 2 solutions of Bitcoin are counter-cyclical to it's dominant brand narrative. How can it simultaneously be a an ossified Store of Value hedge against fiat (with security / scalibility tradeoffs) while hoping to grow up to be the dominant world settlement layer? Who would spend Bitcoin on relatively fixed value commodities or products in lieu of HODL for the promised land logarithmic growth? No one rational. Until we have full market maturity, with ample liquidity and settled price volatility, one of these concepts has to be wrong. Waiting until one of them is the right strategy isn't a strategy. It's a shame that the interview quickly steered away from the vulnerability that is mining incentives, which does a disservice to investors looking for a long term investment in digital assets. PoW is not the only way to solve the double-spend problem, and it certainly isn't the most energy efficient. It also doesn't solve the scalibility trilemma (security, decentralization, scalibility). 2. Bitcoin is not the only large volume / liquid digital asset. Some are making inroads in the massive multi-trillion dollar global remittance market on Layer 1 (read, no Lighting needed). In particular, Mexican / Philippine markets are exploding in daily trading volumes at exchanges like Coins.ph, Bitso, etc. It may only be in the millions at this point, but the stage is set to grow exponentially now that the PoC is out of the bag and will be set to become billions if not trillions. The global FX markets trades in the trillions daily, who will displace the $? Not bitcoin, nor any other digital asset. It will be an interoperable global standard that is currency agnostic, the level playing field you referred to as a philosophical sensibility in open and free markets. Gentlemen, my advice is that instead of chomping at the bits in differentials you need to start considering your role as market makers for the future. Investigate the role of connectors on the Interledger Protocol, a system of connecting micro-payments and payment systems (Paypal, RTGS, MasterCard, Bitcoin, etc.) It's a network of networks not a single dominant liquid layer. Look at projects like ILP, Hyperledger, Kava, Overledger, trade finance networks like R3, etc.. Value needs large routing hubs for interoperable global financial markets to function at low slippage, tight spreads, and competitive FX fees. We will need professionals to tie together CBDCs, STOs, crypto, ERCs, etc. and be part of a pathfinding, value routing table. I can tell you are forward looking individuals, the next trillion dollar companies will be built on an interopable layer and those that route the flow will become the new Oracle for the Internet of Value.
  • ML
    Max L.
    16 April 2020 @ 08:46
    This was awesome. Will read more about crypto.
    • CT
      Crispim T.
      17 April 2020 @ 12:35
      Not "Crypto" Max. Read about BTC. Dont' waste your time. "The Bitcoin Standard" by Saifedean Ammous is a great book to start.
  • BK
    Brian K.
    16 April 2020 @ 09:05
    I would love to see more experienced market makers and HFT firms from the crypto space speak about the evolution of the markets. Firms like Amber, GSR, etc come to mind when thinking about the serious market makers on exchange. OTC desks that see flows serious flows like Cumberland, Kraken, and others would be very interesting to hear from as well. NOTE: RV guys keep mentioning "layer 2" for bitcoin as if it's going to happen and make the whole bitcoin scene explode. It felt that way in 2018. It's pretty clear to most people in the space that it's not happening - not this year, not next year, lucky if ever. There is less than $6.7M in funds locked on bitcoin's touted layer 2 lightning solution. Relative to Bitcoin's marketcap, I think that speaks for itself.
    • SW
      Steven W.
      16 April 2020 @ 13:53
      As a San Francisco based software engineer who attends bitcoin meetups with lightning devs, I can tell you you are mistaken about the second layer. The technology is brand new and highly complex with an intense risk structure. It takes a lot of time to build that type of software and it takes time for it to be adopted, but I assure you it is happening. There is a lot of money being thrown at it and there are teams of the most brilliant people I've ever met working on it. Your point about the money being used on it currently is irrelevant, because IT'S STILL IN BETA. lnd's latest release is 0.10.0. That's amazing that there is "$6.7M in funds locked on bitcoin's touted layer 2" while it's in a beta release.
    • TP
      Timothy P.
      16 April 2020 @ 15:40
      Its clear you have some glaring misunderstandings of what 2nd-Layer means for Bitcoin. The point of the Lightning Network is to serve the domain of micro-transactions with a very high time preference--ie., the ubiquitous "cup of coffee" retail demand and other transactions. The current value in LN channels is approx ~6.3 Million USD notional. That's a lot of coffees, t-shirts, groceries and other retail point-of-sale transactions. https://bitcoinvisuals.com/ln-capacity For larger amounts with a lower time preference, "main chain" transactions are perfectly acceptable, where settlement times in the legacy financial space are on the order of 2 - 3 days, but on-chain, most consider tx's settled with anywhere from 3 - 6 confirmations, so 30 minutes to an hour ideally. As for using "marketcap" as a metric for cryptocurrencies, that's a fool's errand. Better metrics exist from coinmetrics and IntoTheBlock that reflect true movement of value instead of a haphazardly adapted metric from the equity space that doesn't even apply.
    • BK
      Brian K.
      17 April 2020 @ 05:42
      @steven - I too worked on layer 2 solutions and built products integrating lightning network. It's new, it's complex, and I have come to the belief through my work that the tradeoffs of lightning make it unfortunately false hope for the bitcoin community that btc payments will become mainstream. They will not - or at least it is very unlikely. It's far more likely offchain / centralized entities can hold users BTC and offer them easy ways to spend it via card, mobile app, etc without ever needing to settle BTC in the moment. Similar to correspondent banks, OTC relationships will settle on net terms. It's far more practical and incentives are aligned across parties.
    • CT
      Crispim T.
      17 April 2020 @ 12:33
      This always reminds me of people saying the Internet was relatively useless and wouldn't replace things like letters, magazines, business cards and so on. Anyone old enough to have seen the birth of email and the www and having used the Usenet in 1990 remembers how complicated the most simple things were. And today, grandma can send email without knowing a thing about SMTP,POP3, TCP/IP, frame formats or anything else. It just works. Most people drive cars fine and have no idea how the engine works. Lightning and other Layer 2 solutions built on top of BTC will be no different. Use will become much easier, with a lot less friction and complexity. Stop focusing on the present and have the vision to see where we are inevitably heading.
  • CT
    Crispim T.
    17 April 2020 @ 12:20
    Bitcoin (BTC) is really the only "crypto" worth the time. Everything else is casino gambling and/or scams to suck investor and retail funds, grossly overpromising and delivering nothing (Ethereum, etc). 11.5 years of BTC. Still hanging tight even when everything is burning, even without circuit breakers and bailouts - if that's not bullish I don't know what would be.
  • BP
    Barry P.
    17 April 2020 @ 02:20
    Loved it Ash, thanks
    • AB
      Ash B. | Real Vision
      17 April 2020 @ 06:58
      Thanks, Barry. There’s much more to come.
  • FR
    Frank R.
    17 April 2020 @ 06:08
    Bitcoin is not a brand, company, product, etc.. the bitcoin network is the base protocol of a new economic system.
  • CD
    Christopher D.
    16 April 2020 @ 19:06
    Fun (double) interview. Incidentally, I just found an old copy of automated trader mag. HFT is where some very real questions about price formation are asked, and they stay very much below most of our radars.
    • BR
      Brian R.
      17 April 2020 @ 03:58
      What do you mean by old copy of automated trader mag?
  • RA
    Ron A.
    16 April 2020 @ 23:26
    Great discussion Ash, thanks. Mommy taught should we choose to always make our powers for good such a beautiful world would come. You go, Chris & Haim!
  • TS
    Tamim S.
    16 April 2020 @ 22:03
    We need more whistle blowers.
  • JV
    Jan V.
    16 April 2020 @ 18:08
    Last halving is at 2140 (not 2041). Not really a pressing issue imo.
  • TW
    Thomas W.
    16 April 2020 @ 12:34
    Crypto technology is amazing and undoubtedly whatever happens those technologies will be a big part of how markets function in the future. Clearly we are in a moment too, where sovereign bonds / currency loose their value; creating a big opportunity for alternatives. Crypto simply has a massive PR problem because I primarily associate them with people who are gambling rather than investing and aggressive phishing emails. At the moment I see crypto as the Napster was: compared to Facebook now but clearly things have progressed a long way already. Really, I just want to see the proportion that is a bubble squeezed out before investing. I am waiting for one or two people I know to tell me; 'Bitcoin is over and I have lost too much money', then I am interested!
    • BS
      Bart S.
      16 April 2020 @ 15:20
      You remind of that guy in the 80's that was waiting for the gap in gold to be filled - he is still waiting.
    • TW
      Thomas W.
      16 April 2020 @ 15:55
      Did that guy in the 80's invest in other investments that made him more money? Then buy gold at a point where he thought it was a sound investment and make money on that too? I'm not waiting for a price; I'm waiting for it to meet the criteria I have set for a sound investment. I don't have any emotional attachment to any asset. I will buy bitcoin tomorrow if I believe it is the best place to put my money.