Katya Malinova PRO
I am an Associate Professor, Mackenzie Investments Chair in Evidence-Based Investment Management at the DeGroote School of Business, McMaster University, Canada.
Limits to Arbitrage in Markets with Stochastic Settlement Latency
Discussion by Katya Malinova
Nikolaus Hautsch, Christoph Scheuch, and Stefan Voigt
Bitcoin prices in USD, May 25 2018, 17 exchanges
Arbitrage?
Equity trading infrastructure
Sue wants to sell ABX
Bob wants to buy ABX
sell order
buy order
Clearing House
Stock Exchange
Broker
Broker
3rd party tech
custodian
custodian
record beneficial ownership
central bank for payment
Where does trading occur?
Trading in Crypto Markets
Centralized Exchanges
Alternative Markets/Liquidity Systems
Smart on-chain contracts ("Decentralized Exchanges")
Trading on a Crypto Exchange
trade
Settle on the blockchain for digital "assets"
Wire transfer for fiat
Arbitrage on a Crypto Exchange
BTC/USD
ask: 7,600
bid: 7,550
BTC/USD
ask: 7,500
bid: 7,450
buy low
sell high
Arbitrage on a Crypto Exchange
BTC/USD
ask: 7,600
bid: 7,550
BTC/USD
ask: 7,500
bid: 7,450
buy BTC
sell BTC
move BTC to Kraken
Arbitrage on a Crypto Exchange
Wire: free*; 1-5 days
Credit card: 3.5%
trading fee: 10-25 bps
flat fee in BTC \(\approx\) $4-8
\(\approx\) 10-60 minutes
trading fee: 0-26 bps
35 USD + 0.125%
($5 if >$50,000)
1-3 business days;
possible other fees/delays
The impact of the different "legs"/costs in the process?
Arbitrage on a Crypto Exchange
fees and TIME
fees and TIME
\(\Rightarrow\) Compare arbitrage opportunities across "assets"? E.g., with different confirmation times?
Kraken's estimated deposit processing times:
BTC: 60 minutes
ETH: 6 minutes
XRP: near-instant
Also: exchanges are heterogeneous w.r.t. confirmation times, too (10-60 minutes for BTC?)
fees and TIME
\(\Rightarrow\) Can this be exploited to better understand the role of delayed confirmation vs. other frictions?
Some exchanges allow short-selling (e.g., Kraken)
\(\Rightarrow\) Can buy and (short-)sell simultaneously
Arbitrage on a Crypto Exchange
FEES and TIME
FEES and TIME
\(\Rightarrow\) Compare arbitrage opportunities in crypto-to-fiat vs. crypto-to-crypto?
Faster and cheaper to deposit/withdraw cryptocurrencies (relative to fiat)
FEES and TIME
Able to hedge (some of) the risks of storing funds in crypto (instead of USD) after the CBOE BTC futures (Dec 2017?)
Faster and cheaper to deposit/withdraw cryptocurrencies (relative to fiat)
\(\Rightarrow\) Easier/cheaper arbitrage? (E.g., cheaper to "store" BTC on "sell-exchanges"?)
FEES and TIME
Paper: limits to arbitrage because of risk-aversion.
Footnote 11: "can also think of [...] risk-neutral and capital-constrained"
Unlimited arbitrage capital \(\Rightarrow\) hold deposits at all exchanges & resolve both in/out and cross-exchange delays
fees and TIME
To what extent are these approaches equivalent?
Further Comments: Choice of Exchanges?
Higher demand for BTC \(\Rightarrow\) more transactions to be confirmed
\(\Rightarrow\) Latency and volatility are correlated (?)
\(\Rightarrow\) Implications? (Estimated bounds too conservative?)
Further Comments
Explanations for systematic price deviations?
- E.g., capital controls \(\Rightarrow\) "Kimchi premium"
- Persistently lower prices on BTC-e possibly explained by no wire from U.S. citizens or U.S. banks (Kroeger and Sarkar (2017)) + poor governance
@katyamalinova
malinovk@mcmaster.ca
slides.com/kmalinova
https://sites.google.com/site/katyamalinova/
Discussion SAFE 2019
By Katya Malinova
Discussion SAFE 2019
This is a discussion that I gave at the 3d SAFE Microstructure Meeting August 2019. The slides are arranged in a "2x2 table" and meant to be viewed " column-by-column".
