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It seems Coinbase's go to strategy every time markets are volatile. In case people are wondering why is this a recurring problem - this simply perils of Market
by thisisit 9y ago
It seems Coinbase's go to strategy every time markets are volatile.
In case people are wondering why is this a recurring problem - this simply perils of Market Making in a volatile market. As a market maker for customer orders Coinbase needs to fulfill both sides. So to make money they buy from customers at low price and sell back at a high price. So they are collecting spread between bid and ask to make money.
But what happens if the market moves rapidly in one direction? They end up selling low and buying high.
So, they need to reset the market making algorithm. Or shutdown the site for a "fix", long enough that the volatility comes back in their range.
- ethbro 9y agoI've wondered about this. Specifically, how can you make a market in a product that has high violatility and fairly low trading frequency? Seems like anyone doing so would inevitably get fleeced.
- Blackthorn 9y ago> I've wondered about this. Specifically, how can you make a market in a product that has high violatility and fairly low trading frequency? A large spread.
- ethbro 9y agoHmm. So are market makers only ever effecting instantaneous matches? I was under the impression they often held some portion of the asset between buy-sell or sell-buy in order to increase liquidity. (Which would explain why they like HFT, as anything that boosts trade frequency would decrease their exposure)
- Blackthorn 9y agoThey do hold underlying and have to hedge their risk in various ways. A large spread helps a lot.
- qeternity 9y agoCoinbase are not market makers...
- thisisit 9y agoNot on GDAX sure. But, when buying and selling from users, yes they are. They don't create a two way market on coinbase.com. If they did, it will be called an "exchange".