Cross Exchange Market Making

How It Works

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

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 the bid and ask orders (act as a market maker) on the maker exchange (Figure 1).

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.

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

• For cross-exchange market making, you will need to hold inventory on two exchanges. 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).
• 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.

Minimum Order Size

When placing orders on the maker market and filling orders on the taker market, the order amount should meet the exchange's minimum order size and minimum trade size.

You can find more information about this for each Exchange Connectors under the Miscellaneous section.

Adjusting Orders and Maker Price calculations

If the user has the following configuration,

order_amount: 1 ETH
min_profitability: 5

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)). So here the strategy will place the bid order at 95.

Basic Parameters

The following walks through all the steps when running create command.

maker_market

The exchange where the bot will place maker orders.

Prompt:

taker_market

The exchange where the bot will place taker orders.

Prompt:

maker_market_trading_pair

Trading pair for the maker exchange.

Prompt:

taker_market_trading_pair

Trading pair for the taker exchange.

Prompt:

min_profitability

Minimum required profitability for Hummingbot to place an order on the maker exchange.

Prompt:

order_amount

An amount expressed in base currency of maximum allowable order size.

Prompt:

use_oracle_conversion_rate

Rate oracle conversion is used to compute the rate of a certain market pair using a collection of prices from either Binance or Coingecko.

If enabled, the bot will use a real-time conversion rate from the oracle when the trading pair symbols mismatch. For example, if markets are set to trade for LINK-USDT and LINK-USDC, the bot will use the oracle conversion rate between USDT and USDC.

You can also edit it from config_global.yml to change the rate_oracle_source.

Prompt:

Advanced Parameters

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

adjust_order_enabled

If enabled, the strategy will place the order on top of the top bid and ask if it is more profitable to place it there. If disabled, the strategy will ignore the top of the maker order book for price calculations and only place the order based on taker price and minprofitability. Refer to the Adjusting orders and maker price calculations section above. _Default value: True

active_order_canceling

If enabled, Hummingbot will cancel orders that become unprofitable based on the min_profitability threshold. If disabled, Hummingbot will allow any outstanding orders to expire unless cancel_order_threshold is reached.

cancel_order_threshold

This parameter works when active_order_canceling is disabled. 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 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.

top_depth_tolerance

An amount expressed in the base currency 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.

anti_hysteresis_duration

An amount in seconds, which is the minimum amount of time interval between adjusting limit order prices.

order_size_taker_volume_factor

Specifies the percentage of hedge-able volume on the taker side, which will be considered for calculating the market-making price.

order_size_taker_balance_factor

Specifies the percentage of asset balance to be used for hedging the trade on the taker side.

order_size_portfolio_ratio_limit

Specifies the ratio of total portfolio value on both maker and taker markets to calculate the order size if order_amount is not specified.

taker_to_maker_base_conversion_rate

Specifies conversion rate for taker base asset value to maker base asset value.

taker_to_maker_quote_conversion_rate

Specifies conversion rate for taker quote asset value to maker quote asset value.

Exchange Rate Conversion

From past versions of Hummingbot, it uses CoinGecko and CoinCap public APIs to fetch asset prices. However, this dependency caused issues for users when those APIs were unavailable. Therefore, starting on version 0.28.0, Hummingbot uses exchange order books to perform necessary conversions rather than data feeds.

When you run strategies on multiple exchanges, there may be instances where you need to utilize an exchange rate to convert between assets.

In particular, you may need to convert the value of one stable coin to another when you use different stablecoins in multi-legged strategies like cross-exchange market making.

For example, if you make a market in the WETH/DAI pair on a decentralized exchange, you may want to hedge filled orders using the ETH-USDT pair on Binance. Using exchange rates for USDT and DAI against ETH allows Hummingbot to take into account differences in prices.

maker_market: bamboo_relay
taker_market: binance
maker_market_trading_pair: WETH-DAI
taker_market_trading_pair: ETH-USDT
taker_to_maker_base_conversion_rate: 1
taker_to_maker_quote_conversion_rate: 1

By default, taker to maker base conversion rate and taker to maker quote conversion rate value are both 1.

Our maker base asset is WETH and taker is ETH. 1 WETH is worth 0.99 ETH (1 / 0.99) so we will set the taker_to_maker_base_conversion_rate value to 1.01.

While our maker quote asset is DAI, the taker is USDT, and 1 DAI is worth 1.01 USDT (1 / 1.01). Similar to the calculation we did for the base asset. In this case, we will set the taker_to_maker_quote_conversion_rate to 0.99.

To configure a parameter value without going through the prompts, input command as config [ key ] [ value ]. These can be reconfigured without stopping the bot. However, it will only take effect after restarting the strategy.

config taker_to_maker_base_conversion_rate 1.01
config taker_to_maker_quote_conversion_rate 0.99