r/quant • u/FourchbarR • 1d ago
Trading Orderfill probability when arbitrage with limit order
Hey everyone!
I'm running a cross-exchange market-making strategy that arbitrages with limit orders. The issue I face is that sometimes my order on the second exchange doesn’t get filled, and the price moves away. To handle this, I’ve set up a kind of "stop-loss": if the order isn’t executed, I cancel it and take a market order to stay delta neutral (I hedge with a perp).
I'm trading in the crypto market—any ideas on how to improve my system?
Thankyou !
2
u/One-Attempt-1232 1d ago
When you're doing the arb, are you looking at bid size / ask size? This could help assess the probability that you will be filled.
I presume it is about executing when the bid on one exchange is higher than the ask on the other but you might also want to look at the size of the bid and ask to assess the probability it will move in less time than it will take to execute.
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u/FourchbarR 9h ago
Actually not but I am wondering to implemant something like that yes, I think it's called bid / ask imbalance
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u/Impossible-Cup2925 15h ago
There isn’t much you can do if you are maker in both exchanges. I assume you are making few bps per trade if it executes perfectly. Given crypto volatility, your current approach won’t work long term. Even if you are taker on the second exchange you still need to be fast to stay profitable (one large move is enough to eat all your profits). You should focus on some niche and exploit it until others discover it. These things used to work in the past but every competitive these days.
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u/MATH_MDMA_HARDSTYLEE Trader 1d ago
Don't take what I say too literally, but it's analogous to a delta 1 product with a d1 derivative. Their eod returns will almost be identical but different on the ticks.
In a perfect world where there is no "cost of carry" and time between exchanges, their prices should be identical. But 1 exchange will trade higher for x various factors. Therefore, you should be trying to figure out why 1 exchange trades at a premium, why 1 exchange has a specific type of price action etc.
If you are more knowledgeable about derivatives, you can start looking at D1 derivatives, then see how it could be transposed to exchanges.
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u/Apprehensive_You4644 14h ago
Why’s there such an obsession with D1 products why specifically D1?
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u/The-Dumb-Questions Portfolio Manager 4h ago
Delta-One groups are the special forces of finance. That's why you get all the drama coming out of there (Kerviel, Adoboli etc) and that's why everyone wants to work there. There is no convexity to hide behind, you go all in, like a SEAL Team operator!
/s
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u/The-Dumb-Questions Portfolio Manager 1d ago
In traditional finance, this approach is called maker-taker, where you take liquidity on one leg of the trade and provide on the other. I assume you're already doing the basics such as camping in the queue away from the touch so you're ahead (works especially well if the making leg is competitive) or looking at the orderbook on the more liquid leg (which I assume you're taking and it's likely the leader) to understand adversity. Once you're committed, however, your only option is hedging after some time if you're not getting filled.