If the exchange core is your shiny sports car, liquidity is the gas that keeps it running. Liquidity refers to how easy it is to buy and sell assets at stable prices. When users are buying and selling cryptocurrencies on an exchange — or entering into trades — they expect their orders to be executed with lightning speed at the best possible prices. Trading engines are at the beating heart of this operation, matching buyers and sellers so trades are executed.
Andy Bryant, the chief operating officer of bitFlyer Group, told Cointelegraph there are some golden rules that an exchange’s trading engine must follow.
It must be able to work flawlessly under high loads, offer maximum security, and shouldn’t prioritize certain types of customer orders over others.
Safeguards against insider trading and wash trading (both forms of market manipulation) need to be in place, too.
Bryant warned that crypto exchanges live and die by the levels of liquidity they can offer.
Low liquidity pairings often suffer from high volatility, creating the risk of customers who are angry because they didn’t get the price they were expecting or only had part of their order filled. He believes that platforms need to incentivize market-making activity so customers face fewer hurdles when trading — or at the very least, warnings and disclaimers need to be made on low liquidity pairings to help manage expectations.
The rewards of better liquidity can be immense, Bryant said. It creates an enhanced trading environment where there’s less slippage — meaning the difference between the expected price of a trade and its executed price is smaller. This, in turn, leads to more traders joining the exchange and liquidity improving further, generating what he described as a virtuous circle.
fewer hurdles when trading — or at the very least, warnings and disclaimers need to be made on low liquidity pairings to help manage expectations.
“Off-the-shelf” crypto exchanges have become increasingly common of late — white-label products where entrepreneurs can launch their own platforms and access liquidity, all while making customizations so their venture stands out in the marketplace.
Bryant said those shopping around for core exchange engines should look for something that follows his golden rules. Ideally, they should also offer audited code — and have a strong track record of past performance.
But what should this track record include?
Scalable Solutions CEO Mark Berger said excellent technical support should top the list, as well as a decent number of coins and the ability to create new pairings.
According to Berger, scalability should also be a concern, as most white-label providers don’t offer this. He added that mobile apps for iOS and Android are a must, alongside a robust trading API and a user-image-draggled interface. Security needs to be a top priority, and infrastructure must be reliable under high loads, with the best white-label providers giving their clients flexibility to provide local priority, and infrastructure must be reliable under high loads — with the best white-label providers giving their
clients flexibility to provide local priority, and infrastructure must be reliable under high loads — with the best white-label providers giving their clients flexibility to provide local changes and offering a strong development team so new features can be added speedily.
Ivo Sauter, the founder of New Eight, agrees that liquidity is important. He told Cointelegraph that low liquidity pairs are more vulnerable to price manipulation and, in many cases, make larger transactions impossible. He explained that:
“Only exchanges with high liquidity will attract investors — especially if competitors have higher liquidity on an asset.”
He added that there are ways to address low liquidity. Exchanges can make use of automated liquidity platforms and onboard liquidity providers by delivering them with a state-of-the-art environment for trading.
Sauter stressed that liquidity shouldn’t be the be-all and end-all when selecting a core exchange engine that’s off the shelf: “As digital assets also include new asset classes or categories, besides reliability, I would also look for flexibility. It is important to ensure that the system provider is willing to follow the strategy of the exchange and views a defined development roadmap into new assets as a strategic growth case for themselves as well.”
George Zarya, the CEO of Bequant, said the relationship between entrepreneurs and their off-the-shelf exchange provider needs to be more like a partnership:
“At the end of the day, you need to be sure you are in the same boat and you can come to the vendor with any question or issue to propel your business further.” He also warned that exchanges with dry order books don’t get any business and struggle to survive, citing the golden rule that “liquidity drives liquidity.”
Zarya said that an exchange’s clients also need to feel like they aren’t getting ripped off by wide spreads, adding:
“Liquidity is never a bad thing, and driving more liquidity is the best thing exchanges may do for their clients. However, in the case of extreme volatility or if trading illiquid pairs, one may have to implement so-called circuit breakers that halt trading to protect sharp falls in the prices and to calm the market. This feature is not popular in the digital assets space.”
This feature is not popular in the digital assets space.”
Zarya said one of the most common problems in the industry is how exchanges slow down when market volumes pick up, and this can end up costing clients dearly because they’re left unable to execute trades at their desired price. He said:
“Ensuring your matching engine can handle high volumes is equally important to providing liquidity.”