The bitcoin market is about to get a lot faster.
Coinbase Inc., which operates the largest U.S. cryptocurrency exchange, said on Tuesday that it would upgrade its systems with services that cater to ultrafast traders. The upgrade, planned for later this year, will make Coinbase one of the first bitcoin exchanges to welcome the controversial business of high-speed trading.
High-frequency trading, or HFT firms, use computers to buy and sell stocks, futures and other assets in the blink of eye. They accounted for 55% of trading volume in the U.S. stock market last year, according to research firm Tabb Group LLC, but they have only recently begun to dabble in cryptocurrencies.
San Francisco-based Coinbase plans to introduce “low-latency performance,” the company said in a blog post, using a term in the exchange industry that means extremely fast processing times.
Coinbase also said it would allow trading firms to place their servers directly in its data center, a practice called co-location. HFT firms often put their servers next to the computers that power exchanges like Nasdaq Inc. or the New York Stock Exchange, to minimize the split-second delays associated with transmitting data back and forth between the trading firm and the exchange.
According to Coinbase, the plan will benefit customers by reducing bid-ask spreads—the difference between the buying and selling price of an asset. Advocates of HFT say the growth of high-speed trading in the stock market over the past two decades helped drive bid-ask spreads down to just one penny in many big stocks.
But Coinbase’s move is likely to raise eyebrows, since many investors view high-speed traders with suspicion. Critics like Michael Lewis, author of the 2014 best-seller “Flash Boys,” have alleged that HFT firms take advantage of slower-moving players.
Coinbase will ensure that HFT firms aren’t given any unfair advantages, said
general manager of Coinbase’s exchange, called GDAX.
“We are going to be thoughtful and deliberate in the way we do that, to make sure we don’t disadvantage any market participant over another,” Mr. White said in an interview.
After the upgrade is complete, processing times at Coinbase will be measured in microseconds, or millionths of a second, Mr. White said. Greater participation by electronic traders will boost the depth of Coinbase’s markets and help the company win over big institutional traders, such as hedge funds, which are increasingly interested in trading crypto, Mr. White added.
a partner at brokerage Themis Trading and a vocal critic of HFT, warned that crypto exchanges may find it lucrative to offer special perks to high-speed traders.
“The stock exchanges in the equity market were the ‘arms merchants’ that sold speed advantages to HFT so they could be faster than traditional investors,” Mr. Saluzzi said in an email. “It looks like Coinbase wants to be one of the arms merchants for the crypto world.”
Coinbase isn’t the first bitcoin exchange to gear its systems for ultrafast traders. Gemini, the New York-based crypto exchange founded by Cameron and Tyler Winklevoss, said its trade-execution times are already a matter of microseconds. Gemini’s systems are based in the same New Jersey data center used by
Cboe Global Markets
a major options and equities exchange operator.
Several electronic trading firms are already active in cryptocurrencies, including Chicago-based DRW Holdings LLC and Jump Trading LLC and New York-based Hudson River Trading LLC, Jane Street Group LLC and
But many crypto exchanges operate on relatively slow and flimsy technology, compared with the powerful, battle-tested computer systems used by Nasdaq or the NYSE. Last year, a number of digital-currency exchanges suffered outages during periods of heavy investor interest in bitcoin, including GDAX and Europe-based Bitstamp.
Write to Alexander Osipovich at firstname.lastname@example.org
Published at Tue, 15 May 2018 12:03:52 +0000