May 20, 2019

Market Orders With Protection

If you checked the patch notes for the May 7th system upgrade you may have noticed this phrase in the list and be wondering what on earth it means. Well it’s not technically a new order type, however it is a change to how market orders react with our trading bandwidths.

The trading bandwidths

For those unfamiliar, Deribit operates with trading bandwidths in place. What this means is that there is an upper and lower price at which trades can be executed on any given instrument. For example on the Bitcoin Perpetual contract the bandwidth is currently set at mark price +/- 1.5%. So if the perpetual is trading at $5,000, the bandwidths will be $4,925 and $5,075.

What these bandwidths do is stop huge deviations away from the current price of the asset (as defined by the mark price).
There are a few reasons why large wicks like that can happen:

  • A large trader trying to push the price around (a stop hunt for example)
  • An accidental fat finger
  • A cascade of liquidations and/or stop losses

These are usually just deviations away from the ’real’ price. If there is a genuine move in price across all exchanges, then the index will also be moving bringing the mark price and the bandwidths along with it. In this way the bandwidths are designed to only stop unnatural spikes in price.

Market orders and trading bandwidths

Market orders will attempt to fill the order at the best price possible, moving deeper and deeper into the order book until it is completely filled, not caring about the price it eventually reaches. So what happens when a market order that is attempting to fill ‘at any price’ runs into one of these bandwidths that stops orders executing outside a certain range?
The market order is saying ‘I’ve run out of good prices, I’ll take any price’, and the bandwidth is saying ‘you can’t execute at this price it’s outside the allowable range’.

Previously on Deribit the market order would continue to fill right up to the bandwidth as normal, but then any remaining quantity yet to be filled would be cancelled. While this is normal behavior with a bandwidth system, it is not what most traders expect to happen with a stop loss.

New functionality

As of this latest update any remaining quantity will no longer be cancelled, instead a limit order for the remaining quantity will be placed into the order book at the bandwidth limit waiting to be filled.
In this way it still obeys the bandwidth rules, but is also more in line with what traders want their stop loss order to do.

The system as a whole is still protected from big price spikes and traders stops are safer as they will no longer have portions cancelled for hitting the bandwidth. Win, win!

This change was partially the result of feedback from existing Deribit users.

Deribit – May 2019