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FTX monthly: Insights into traders' thinking patterns

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One advantage of linear contracts with stable COINS as a deposit is that traders can operate trading pairs in multiple currencies using only one deposit currency

Original title: FTX Monthly - Trader Special! & NBSP; Takes you deep into the Thinking Patterns of traders

Source: FTX

directory

FTX June overview
How does CMS view risk
Quick thinking
Be wary of buying a reverse contract or Bitmex
FTT destroyed
FTX's hot topic this month
Readers to answer questions

FTX June overview

June was quite a busy month for FTX. We launched a series of products, upgrades and new features this month. Next, we will continue to solve the feedback problems raised by the community and continue to provide better services to our users with innovative thinking.

DeFi

The current popularity of DeFi goes without saying, so we launched COMP, cUSDT, BAL, KNC and DeFi index in June. This is exciting news for the vast majority of users of our platform -- as of today, our users can use cUSDT as a deposit for all futures and options transactions.

The mobile terminal

To provide a more complete experience, FTX Pro has introduced a series of new features. Including: but at the same time, position and number of full screen display order chart, order change, into the gold/extraction history query, market information (holdings), sun single share of profit and loss, as well as some details optimization, for example in the dish according to the depth, the market page sorting, and hide the purse page asset class balance is zero.

Optimize user interaction and user experience

We carefully consider and evaluate every UI/ UX-related suggestion put forward by users, and optimize and implement the problems they are concerned about. In June, we realized the following optimizations: drag advanced order list, new design of pleasing APP interface, corresponding identification of asset items, click TxID, color PnL, color panel album, more reasonable layout chart, UI renovation of legal currency inputting function, and dynamic handling charge card in setting.

options

Options and MOVE volatility contracts are now available to display IV and Greeks. Now, clicking on "Trade" guarantees that the price you receive will be the same or better than the price you received when you traded. The option strike price ladder is now 10. We will continue to strive to provide users with the best option trading platform in this asset class, please look forward to more optimization updates!

Online voting

We have been working hard to involve our users in the development and planning of FTX in various ways. With this in mind, we created a voting page to give our users the opportunity to directly participate in our coinage decisions. The influence of voters will be proportional to monthly trading volumes and FTT holdings.

Quantitative space

New features have been phased in this month, including a series of features for MOVE volatility contracts and prices.

FTX Podcast

Our exclusive podcast channel is online! Here, we will discuss with you the growth of enterprises and character stories in the field of cryptocurrency and blockchain.

How does CMS view risk

Author of this chapter: CMS Holding

In the eternal battle between man and machine in the financial world, CMS finds itself deeply rooted in the human camp. This means that our approach to EV and risk analysis is more ambiguous than that of traders based on system and technical analysis, who can judge the optimal balance of risk by more specific opening and closing prices. So how does this work?

Our world is made up of two different kinds of assets, operational and non-operational. Actionable risk refers to those liquid and executable positions, such as long BCH, short ZEC or all bets on BBQcoin. This is a large part of the tradable whole at any one time, and operational risk is 75% of our risk tolerance. Non-tradable positions, such as start-up equity and unreleased tokens, are illiquid or untradable for some reason, taking up the remaining risk tolerance in the table.

For each non-actionable position, there is a net nominal exposure to how much money is exposed to risk that we rarely hedge against other assets. This means that if we want to be long a currency in an investment, we have to take the corresponding risk until the position is liquidated, rather than offsetting its exposure to liquid markets by selling other assets. All our decisions are made around this point.

So what do we need to consider about the non-liquid position we are buying, in addition to the immediate benefits it will generate? The first and most important thing is the time to close positions. To understand why this is so important, you first need to know the risk-free rate of return at which you trade to compare. There is no such thing as a risk-free coin, but we prefer to use the benchmark rate of return, the cash lending rate calculated by the spread between the cash and futures trades. So when the curve is in contango, we have to have a particularly interesting trade to get the balance sheet moving for a while.

Each actionable long/short position faces a net BTC exposure to the master book, as well as some other notional exposure. The master ledger is the collection of all of our current transactions and is blended into a higher and more holistic view of risk. In general, we will always maintain a certain target for the overall risk, which is calculated in terms of BTC, while also putting a hard ceiling on other nominal exposures.

The reason why you need different nominal exposure limits and BTC exposure limits is related to how we calculate BTC exposure. Every asset has a beta, like S& P) For stocks, the beta value of digital currency is measured by the BTC price. This beta represents how much the asset price changes for each BTC price change, so if you think that the price change of an asset is twice that of BTC, the beta value of the asset is 2.0. Now this beta depends on time, which raises the question of how much historical data is reasonable to refer to? Usually we use a short window of a month or so, because you might have some mechanism change and cause the price to change very quickly, like DeFi, which is hot all of a sudden, so you want a short history. Therefore, for some assets with low beta values, such as LEO, you can place large notional amounts before the total BTC risk changes. In addition, you may find yourself 3 times leveraged in dollars, but 1 times leveraged in BTC, which is quite dangerous.

So does that mean you can buy BSV to the maximum as long as you use global risk? No, the magnitude of personal risk is usually instantaneous, as is X's exposure to some nominal risk, after a change or change, that is likely to perish in mere talk. If the trade puts us out of our comfort zone, then you need to balance it by buying and selling other products, sometimes BTC, sometimes ALT, sometimes TRUMP futures, which we don't actually do.

You always end up with positions where there are things that you like, and things that you're not that interested in but you need to hold to hedge against beta. At a given point in time, you can have a million reasons to like or dislike an object, but they have nothing to do with your risk profile.

Don't worry, that's not all. Keep in mind that financing concerns for illiquid positions don't go with the name of the liquidity. You still have to figure out how to clear the roadblocks, and more importantly, you need to consider the financing implications of your positions. If you buy cash, you are burning cash, so you will face the same rules and minimum returns as illiquid positions. If you're using futures, you have to think about what kind of financing you're going to use, is it going to be through variable financing, or is it going to be long-term futures? And what exactly does this financing look like? Depending on which direction you are trading and the current/contango situation, you may not only lose money, but you may even lose some money, whereas with perpetual contracts you are in undefined futures finance. In general, we want to get overall returns by planning and structuring our futures positions, unless we think the basis itself is too cheap, but that's another parameter to consider. You also need to keep an eye on your portfolio's overall benchmark risk, especially since the basis itself trades against beta relative to the market.

These parameters may seem like a lot, but like any good step-by-step system, they allow you to focus on discovering market advantages, and eventually, the actions will melt into your memory. You just need to remember which key to press.

Quick thinking

This chapter is written by Samuel Trabucco-Alameda Research Quantitative trader

Take a look at each of the cryptocurrency trading worlds (real!). Situation, and then 60 seconds to develop a response strategy. This is the amount of time I can actually evaluate each situation as it happens (sometimes even less) :

• BCH is about to get a hard fork, and a controversial one. It is not clear how much value the bifurcated BCH will retain, but it is clear that it must be "less than all". Some OKEx futures become invalid after the fork, so you can sell them in bulk or buy the spot (trading at the maximum discount allowed by OKEx). OKEx then tweeted that their contract would expire early, perhaps even within minutes, allowing it to expire at an unexpectedly high price. What should you do then?

• BNB started to collapse and a few minutes later you saw reports that Coan -- a big bourse with a good track record and a platform where you do a lot of trading and put a lot of capital -- had been hacked. Obviously some people had been informed ahead of time, but the public only knew about it 10 seconds ago. What should you do then?

• BTC prices are plummeting amid a global epidemic and economic downturn, and they don't seem to be stopping yet. Products and platforms (where you trade frequently and hold a large number of positions) will cause massive clearing and trading chaos. Premiums (for contracts and cash between exchanges) have risen sharply, there is a lot of trading going on everywhere, and your own position is at risk of bursting at any time (and because of the limited speed of blockchain trading, money cannot be moved quickly). Your capital is limited, and the right way to deal with it is changing fast. BTC fell below $4,000 after BitMEX liquidated, and BitMEX fell. What should you do then?

Such a scenario could bring otherwise astute and rational policymakers to a standstill. They have to make difficult decisions with huge stakes in a very short period of time -- it's conceivable that panic can make it hard to make decisions -- let alone make the right or almost right decisions. Why do people struggle with this?

There are several reasons for this. A big part of the reason is that many people, especially those with high iQs who are good at maths and end up as quantitative traders, are trained to think deep and come up with perfect solutions to problems. With enough time and a clear problem to solve, they will be able to do it easily -- the kind of thinking and skills that Alameda relies on to build and maintain its models. But when faced with a very complex problem and having to make a decision in five seconds, they may also lose their grip because they are not used to giving a reasonable solution in such a short time - they are more used to taking longer to make a big decision.

Another reason is our natural tendency to fight or flight. When you are faced with a complex new situation and have little time to think fully, even if you are naturally inclined to fight against adversity, you may in fact have no idea how to react. Especially when the only thing you know about the system's function is how good your bet is (for Alameda, the best decision is often worth millions more than the worst), then fighting is sometimes unrealistic. As a result, many people flee by default (when trading, this usually means taking the least action, or following the actions of others).

The third reason is loss aversion bias. People often make choices that minimize their potential losses, even if they don't maximize their EVs. The probability of winning more is not enough to offset the probability of losing more, so they take a passive stance and do neither. If the potential losses are large relative to net assets (or future earnings potential), it makes sense to do so -- and where that line falls can be a delicate risk management issue. However, even if the loss is small, many people choose to avoid the loss even if they know the risk is positive, which is a bias that real-time traders need to overcome.

So how do you better deal with these factors? "Practice" is an unsatisfactory answer. It's hard to practice reacting to a situation where millions of dollars are at the center of a storm, because you often don't get a chance to do that until you get used to it. But you can tackle some of the underlying issues first so that you can play better in those situations -- and I can say some of the experiences and awareness exercises that have helped me.

I majored in mathematics in college, and for a time I even believed that I would go into academia. I often spend hours or even days working on a problem, so I naturally tend to take longer to find the perfect solution. Interestingly, my experience with middle and high school math competitions has helped me a lot here -- for example, I practiced a lot in MathCounts, and the goal of this competition is to make lots of questions as quickly as possible. Practicing fast math problem solving is a direct way to practice thinking fast instead of deep. It can improve your accuracy without getting too slow.

I've always liked strategy games, especially those where you have to make a lot of tough decisions in a game. I've played a lot of different games -- I've spent hundreds of hours playing chess, scrabble, poker, Hearthstone, Dominion and Magic parties -- but what attracted me was the process of making tough decisions under uncertain conditions. These games require you to make hundreds or thousands of difficult decisions (all based on probabilities), and the skills you learn in the process translate directly into the skills you need to trade -- which also helps improve your ability to think quickly.

In the first few years of trading with me in college, I played a lot of poker. At first, I was terrified of losing money, even if it was only a tiny fraction of my net worth (even if it was only a tiny fraction of the bet I had set myself!). . For example, in many cases, the right way to play is all-in, which I don't do because it could cost me all my money. But in the long run, refusing to play correctly in situations like this can simply be understood as the difference between making average profits and losing money. Eventually, I convinced myself at this point, after trying a few times and losing "big" a few times -- but winning more. A few big losses gave me the confidence to make bigger bets. Now I've made and lost far more money than I ever imagined, many times over -- seven figures no longer bother me.

How can I apply these skills to trading? Let's take a closer look at one of my (and other Alameda traders') responses to one of these situations - the COVID crash of March 12.

Chart 1: BitMEX trading performance at 11AM UTC March 12

There were days when I had to make a series of tough, quick decisions (although I was exhausted and "emotionally unstable" during this time, and I was too busy). But a microcosm of the whole thing is when BTC looks like it could go back to zero after a series of BTC's perpetual contracts on BitMEX: What are the related factors influencing the decision?

• Buying a contract has three elements: how high is the premium, how much money can we extract from its profits, and how close will it get to bursting positions? The normal risk indicator is completely useless - bitcoin typically moves 10 per cent within five minutes.

• For a product we don't have the money for but are desperate to buy -- how desperate? How long is the transfer expected to take? And how much would a temporary loss of capital in the meantime cost us in expected value? Funds can be tied up for a long time due to transfer, which has some special effects. For example, "We can't do this with margin, which will increase our chances of being out of stock by 20% and cause a large loss", which has never happened before.

• At different points in time, should we be long or short Delta? Of these factors change very fast, and with unusual situation is different, but in many ways they are more intuitive and "easy" success, if you think quickly the effects of various events on the market - for example, staring at the BitMEX book and guess at the end of the blowing up of deity (some time) to predict long time will get higher success rate, similar things happen everywhere.

Any small change can affect these factors, and our entire team makes a large number of decisions every minute that have a significant impact on trading and profit and loss. There's a lot of Shouting and emergencies in the team at work - it's cool to be in such a (high-pressure) environment. I often cry hoarse because of this!

The fall of BitMEX is the culmination of this fun. At the time there were hundreds of large positions on BitMEX that had been cleared - will they ever be liquidated? Were these explosions intentional? How will the market react? Where will the money go on BitMEX? If I have a position on it and BTC continues to fall, will I be sold out? How long will this last? There are a lot of questions, many of which are extremely uncertain, but some of the conclusions we have to make immediately -- like how the market will react.

Knowing that the market is likely to rise as a result (users think the boom is over, so there will be a recovery) means that you can actually anticipate the inertial effect of BTC rising, which actually calms some of the pending clearing demand and also means that it will continue to rise. In addition, this changes the way margin and positions are calculated - for example, if we expect BTC to rise, we may risk taking a short position in the highest priced contract. How quickly you can figure this out will determine whether you earn millions more, because it will determine when you can escape the risk.

We also made a lot of decisions during that time -- how do we apply the S&P to our model? How do we prioritize market making when liquidity on all the exchanges has plummeted? Which exchanges do we have to use by default? Did we miss anything that would affect the currency? And so on. And there is no standard answer to these questions. The answers change all the time! You can never make a perfect best decision because it's unbelievably complicated -- but you can make a good one, and we did.

No matter how good you are at making quick decisions, it still feels like you're not doing enough. If you are given five seconds to make a decision that you will regret for the rest of your life, you will not be able to make up your mind immediately even when everyone agrees on the best decision. Recognition of yourself is also an ability to make it easier for you to deal with potential losses (and the possibility of future regret) and to believe that if the same thing happened a hundred times over, you would have done it already -- so you have to believe in yourself when it actually happens. It's hard to do, but it's definitely worth it.

Be wary of buying a reverse contract or Bitmex

This chapter is written by Clarens Caraccio-Nibbio quantitative Trader

In today's crypto contract market, perpetuity is the order of the day. While some established exchanges such as Bitmex have introduced "inverted" perpetual contracts, the more popular ones on FTX, COIN-EQUITY and other platforms are actually "linear" contracts. What's the difference?

Traditional financial markets have mostly used "linear" contracts, meaning that their exposure (Delta) is constant. If a person buys a "linear" BTC/USD contract, his delta will be 1 no matter what the BTC/USD price is. The profit and loss of this position is calculated in DOLLARS: 1 x (closing price - opening price). Everyone knows the basic formula.

Early cryptographic exchanges, however, were reluctant to trade dollars in favour of BTC (perhaps for policy reasons -- who can argue with the SEC?). . It would be nice if mortgage and profit and loss could be replaced by BTC.

This is where "reverse contracts" enter the fray. It is still quoted in THE form of BTC/USD, but its contract number is calculated in USD, not BTC. So the dollar Delta that the trader gets is constant, and the Delta of the BTC changes, is equal to

Now the Delta of his position is a spot function. The profit and loss calculation formula of the "reverse" contract is as follows:

* * * * * * * * * * * * *

Its profits and losses are BTC's, so it eschews the dollar.

In more detail, the delta value of the "reverse" contract was Spot1 and its gamma was Spot−12

The gamma of the "inverse" long is negative, and it is expensive to hedge with delta (because delta is bought high and delta sold low),

By contrast, if you short the "inverse" contract, then your Gamma is positive (by buying delta at a low price and selling delta at a high price).

As a result, a long "reverse" contract is riskier than a short one. As prices continue to fall, delta positions accumulate and traders become more and more at risk of bursting.

Or to put it this way, although the dollar value of the position is constant, the value of THE BTC as a deposit depreciates as the BTC/USD price falls, thus increasing the risk of a breakout.

The recent trend in the crypto contract market is for linear contracts that use stable COINS as deposits, such as USDC, TUSD and the controversial USDT. FTX is also included in this list and can accept stable currency as a deposit and trade linear contracts (FTX also accepts non-US dollar deposits, but these are beyond the scope of this article). The coin security contract only accepts USDT as the deposit, and the contract is quoted with BTC/USDT price, which is different from THE BTC/USD price.

One advantage of linear contracts with stable COINS as a deposit is that traders can operate trading pairs in multiple currencies using only one deposit currency. Both BTC/USD, ETH/USD and Altcoin /USD only need to use the same stability currency as the deposit, and the profit and loss will be settled in the form of stability currency.

As a result, traders don't have to actually hold a fake currency in order to go long or short it.

Bitmex tries to achieve the same effect with dual-currency contracts.

They still use BTC as deposit and settlement method, but the actual transaction pair does not involve BTC. Take Bitmex's ETH/USD dual currency contract for example, the ETH value of this contract is equal to 0.000001 x BTC/USD price. Therefore, its Delta value is a function of the BTC/USD price in multiples of 0.000001. Profit and loss is also realized in the form of BTC, whose formula is: 0.000001x (closing price -- opening price). So its profit and loss is a linear function of ETH/USD but it does use BTC. This complicates the job of the trader. What if ETH/USD goes up but BTC/USD goes down? The trader will still settle with BTC, but as THE BTC/USD price falls, his actual dollar return will eventually be much lower.

Thus, if you are trading against the dollar, dual-currency contracts are more complex and less straightforward than linear contracts with stable currencies.

FTT destroyed

FTX has destroyed 4.95 per cent of the FTT circulation supply, while the insurance fund holds 5.25 million FTTS, or about 5 per cent of the circulation supply. We destroyed 9.95% of the FTT cycle supply in the ecosystem in one year and one month. This is a good result to watch, based on a comparison of rates between exchanges in the chart below.

Figure 2: Fee comparison between Exchanges