Cross Exchange Market Making

How It Works

Cross exchange market making is described in Strategies, with a further discussion in the Hummingbot white paper.

Updates to strategy

The cross exchange market making strategy has been updated as of v0.15.0, so that it will always place the order at the minimum profitability level. If the sell price for the specified volume on the taker exchange is 100, and you set the min_profitability as 0.01, it will place the maker buy order at 99. The top depth tolerance is also now specified by the user in base currency units. Please do not use old configuration files for running this strategy.

Schematic

The diagrams below illustrate how cross exchange market making works. The transaction involves two exchanges, a taker exchange and a maker exchange. Hummingbot uses the market levels available on the taker exchange to create bid and ask orders (act as a market maker) on the maker exchange (Figure 1).

Figure 1: Hummingbot acts as market maker on maker exchange

Figure 1: Hummingbot acts as market maker on maker exchange

Buy order: Hummingbot can sell the asset on the taker exchange for 99 (the best bid available); therefore, it places a buy order on the maker exchange at a lower value of 98.

Sell order: Hummingbot can buy the asset on the taker exchange for 101 (the best ask available), and therefore makes a sell order on the maker exchange for a higher price of 102.

Figure 2: Hummingbot fills an order on the maker exchanges and hedges on the taker exchange

Figure 2: Hummingbot fills an order on the maker exchanges and hedges on the taker exchange

If a buyer (Buyer D) fills Hummingbot's sell order on the maker exchange (Figure 2 ❶), Hummingbot immediately buys the asset on the taker exchange (Figure 2 ❷).

The end result: Hummingbot has sold the same asset at $102 (❶) and purchased it for $101 (❷), for a profit of $1.

Prerequisites: Inventory

  1. For cross-exchange market making, you will need to hold inventory on two exchanges, one where the bot will make a market (the maker exchange) and another where the bot will source liquidity and hedge any filled orders (the taker exchange). See Inventory Requirements.

  2. You will also need some Ethereum to pay gas for transactions on a DEX (if applicable).

Initially, we assume that the maker exchange is an Ethereum-based decentralized exchange and that the taker exchange is Binance.

Adjusting Orders and Maker Price calculations

If the user has the following configuration,

order_amount: 1 ETH
min_profitability: 0.05

and as per market conditions we have the following,

Sell price on Taker: 100 USDT (on a volume weighted average basis)
Top Bid price on Maker: 90 USDT (existing order on the order book, which is not the user's current order)

If adjust_order_enabled is set to True: The bid price according to min profitability is 95 (100*(1-0.05)). However as top bid price is 90, the strategy will place the bid order above the existing top bid at 90.01 USDT

If adjust_order_enabled is set to False: The bid price according to min profitability is 95 (100*(1-0.05)). Here the strategy will place the bid order at 95.

Configuration Walkthrough

The following walks through all the steps when running config for the first time.

Tip: Autocomplete Inputs during Configuration

When going through the command line config process, pressing <TAB> at a prompt will display valid available inputs.

Prompt Description
What is your market making strategy >>> Enter cross_exchange_market_making.
Import previous configs or create a new config file? (import/create) >>> When running the bot for the first time, enter create. If you have previously initialized, enter import, which will then ask you to specify the config file location.
Enter your maker exchange name >>> In the cross-exchange market making strategy, the maker exchange is the exchange where the bot will place maker orders.

Currently available options: binance, radar_relay, coinbase_pro, ddex, idex, bamboo_relay, huobi, bittrex, dolomite (case sensitive)
Enter your taker exchange name >>> In the cross-exchange market making strategy, the taker exchange is the exchange where the bot will place taker orders.

Currently available options: binance, radar_relay, coinbase_pro, ddex, idex, bamboo_relay, huobi, bittrex, dolomite (case sensitive)
Enter the token symbol you would like to trade on [maker exchange name] >>> Enter the token symbol for the maker exchange.
Example input: ZRX-WETH
Note: ensure that the pair is a valid pair for the exchange, for example, use WETH instead of ETH.
Enter the token symbol you would like to trade on [taker exchange name] >>> Enter the token symbol for the taker exchange.
Example input: ZRX-ETH
Note: ensure that (1) the pair corresponds with the token symbol entered for the maker exchange, and that (2) is a valid pair for the exchange. Note in the example, the use of ETH instead of WETH.
What is the minimum profitability for your to make a trade? (Enter 0.01 to indicate 1%) >>> This sets min_profitability (definition).
What is your preferred trade size? (Denominated in the base asset) >>> This sets order_amount (definition).

Configuration Parameters

The following parameters are fields in Hummingbot configuration files (located in the /conf folder, e.g. conf/conf_cross_exchange_market_making_strategy_[#].yml).

Term Definition
min_profitability An amount expressed in decimals (i.e. input of 0.01 corresponds to 1%).
Minimum required profitability in order for Hummingbot to place an order on the maker exchange.

Example: assuming a minimum profitability threshold of 0.01 and a token symbol that has a bid price of 100 on the taker exchange (binance), Hummingbot will place a bid order on the maker exchange (ddex) of 99 (or lower if adjust_order_enabled setting is true) to ensure a 1% (or better) profit; Hummingbot only places this order if that order is the best bid on the maker exchange.
order_amount An amount expressed in base currency of maximum allowable order size. If not set, the default value is ⅙ of the aggregate value of quote and base currency balances across the maker and taker exchanges as determined by the order_size_portfolio_ratio_limit.

Example: assuming an order amount of 1 and a token symbol of ETH/DAI, the maximum allowable order size is one that has a value of 1 ETH.
adjust_order_enabled True or False
If enabled (parameter set to True), the strategy will place the order on top of the top bid and ask if it is more profitable to place it there. If this is set to False, strategy will ignore the top of the maker order book for price calculations and only place the order based on taker price and min_profitability. Refer to Adjusting orders and maker price calculations section above. Default value: True
active_order_canceling True or False
If enabled (parameter set to True), Hummingbot will cancel that become unprofitable based on the min_profitability threshold. If this is set to False, Hummingbot will allow any outstanding orders to expire, unless cancel_order_threshold is reached.
cancel_order_threshold An amount expressed in decimals (i.e. input of 0.01 corresponds to 1%), which can be 0 or negative.
When active order canceling is set to False, if the profitability of an order falls below this threshold, Hummingbot will cancel an existing order and place a new one, if possible. This allows the bot to cancel orders when paying gas to cancel (if applicable) is a better than incurring the potential loss of the trade.
limit_order_min_expiration An amount in seconds, which is the minimum duration for any placed limit orders. Default value: 130 seconds.
top_depth_tolerance An amount expressed in base currency which is used for getting the top bid and ask, ignoring dust orders on top of the order book.

Example: If you have a top depth tolerance of 0.01 ETH, then while calculating the top bid, you exclude orders starting from the top until the sum of orders excluded reaches 0.01 ETH. Default value: 0.
anti_hysteresis_duration An amount in seconds, which is the minimum amount of time interval between adjusting limit order prices. Default value: 60 seconds.
order_size_taker_volume_factor An amount expressed in decimals (i.e. input of 0.01 corresponds to 1%), which specifies the percentage of hedge-able volume on taker side which will be considered for calculating the market making price. Default value: 1.
order_size_taker_balance_factor An amount expressed in decimals (i.e. input of 0.01 corresponds to 1%), which specifies the percentage of asset balance to be used for hedging the trade on taker side. Default value: 0.995.
order_size_portfolio_ratio_limit An amount expressed in decimals (i.e. input of 0.01 corresponds to 1%), which specifies the ratio of total portfolio value on both maker and taker markets to be used for calculating the order size if order_amount is not specified. Default value: 0.1667.