Max Boonen is founder and CEO of crypto trading firm B2C2. This post is the second in a series of three that looks at high-frequency trading in the context of the evolution of crypto markets (you can see the first here). Opinions expressed within are his own and do not reflect those of CoinDesk.
The following article originally appeared in Institutional Crypto by CoinDesk, a free weekly newsletter for institutional investors focused on crypto assets. You can sign up here.
Carrying on from an earlier post about the evolution of high frequency trading (HFT), how it can harm markets and how crypto exchanges are responding, here we focus on the potential longer-term impact on the crypto ecosystem.
First, though, we need to focus on the state of HFT in a broader context.
Conventional markets are adopting anti-latency arbitrage mechanisms
In conventional markets, latency arbitrage has increased toxicity on lit venues and pushed trading volumes over-the-counter or into dark pools. In Europe, dark liquidity has increased in spite of efforts by regulators to clamp down on it. In some markets, regulation has actually contributed to this. Per the SEC:
“Using the Nasdaq market as a proxy, [Regulation] NMS did not seem to succeed in its mission to increase the display of limit orders in the marketplace. We have seen an increase in dark liquidity, smaller trade sizes, similar trading volumes, and a larger number of “small” venues.”
Why is non-lit execution remaining or becoming more successful in spite of its lower transparency? In its 2014 paper,