Guide to how Orderbook’s market making trading strategy works
Headquartered in Singapore, Orderbook’s automated trading team is comprised of former bank and investment FX traders with over two decades of trading and technical experience. The team spent over two years of research and testing before launching Orderbook as a retail product.
Orderbook developed its own proprietary AI that harnesses the same professional FX market making trading methodology adopted by banks and applied it to the cryptocurrency market.
What is Orderbook’s business model?
Using this AI, Orderbook trades its own funds and allows customers to copy the trades of our AI by connecting their own crypto exchange accounts (Binance, Bitget, Bybit, and FTX) to Orderbook through API connectivity.
In return, Orderbook charges a 20% profit sharing fee of the daily profits based on high-water mark and a daily subscription fee of 0.99 USDT for the copy trading service.
In short, Orderbook is a company that provides crypto copy trading services.
How did Orderbook get its name?
Orderbook got its name from its trading strategy. In the past, bank traders did not have the luxury of using fancy electronic order management systems that are common today. They traded through the phone and recorded each transaction in a book which is commonly called the “orderbook” and this book records the details of the inventory they hold. How these traders quoted buy and sell prices of the securities they specialise in will depend heavily on their inventory status and market volatility. This process of quoting prices and inventory management is called “market making”.
Management of the inventory “book” is key to market making. Hence, our name “Orderbook”.
How does the strategy decide whether to buy or sell Bitcoin?
Customers often ask how the Orderbook AI decides on when to buy or sell. As a former senior bank FX trader, the buy-sell prices which I had quoted to customers reflected the risks that I was willing to take and the status of the inventory in my book.
For example, during normal volatility, if a customer wanted to sell ten million USD for SGD, I would have quoted a spread of five basis points. However, if the volatility was high and if the USD was trending down, I would have quoted a spread of ten basis points. Or if the amount of USD in my inventory is high, I may also have quoted a spread of ten to twenty basis points to accommodate the additional risks.
As a rule of thumb, we follow the below formulas:
Spread = Expected Risk + Transaction cost
Inventory level ↑ = Probability of Expected Risk ↓
Orderbook’s AI will study price volatilities in BTC and decide when to buy or sell. The higher the assumed risks, the wider the spreads.
Price to Buy = Current price – (Expected Risk + Transaction cost)
Price to Sell = Current price + (Expected Risk + Transaction cost)
Depending on market patterns and calculated probabilities of market directions, the AI will decide on how many BTC to hold as inventory at any given point in time. When the probability of expected risk is high, the strategy will tend to hold less inventory.
Probability of price going down > 60% = Inventory reduce by 20%
Probability of price going down > 70% = Inventory reduce by 40%
Trading transaction costs is also another important factor to be taken into consideration. Banks have very low or close to zero transaction cost for each trade. Hence, they can execute high number of trades per day earning small but guaranteed spreads per trade.
For Orderbook’s customers, transaction costs of various crypto exchanges range from 0.10%-0.50% for each trade. The spreads set by Orderbook’s AI will have to be wide enough to compensate for the risks taken. Else these transaction costs will eat into trading profits which will thus make the risk/reward ratio unattractive in the long term. With wider spreads, the number of transactions per day will naturally be much lower. Orderbook’s AI performs one to three trades a day on average.
Why crypto? Why Bitcoin?
Some may wonder why did Orderbook choose to trade crypto instead of forex or stocks?
The main reason is because cryptocurrency exchanges have provided direct access to the orderbook of the market and for spot trading, you are dealing directly with someone who wants to buy or sell their crypto via blockchain. This greatly reduces the transaction costs as there are no brokers involved.
Positive long-term outlook and higher volatility of cryptocurrencies also provide ample trading opportunities to profit. For any active trading strategies, market volatility is needed to generate enough trades for positive expectancy to work and this is evidently so in the crypto market as it continues to grow in market cap with fresh inflows of funds from institutional investors.
Advancements in technology have also paved the way for copy trading and this has allowed Orderbook to serve our customers in a secure and transparent way. Customers can simply connect their crypto exchange account to Orderbook using an API key to start copying our trades. Their crypto assets stay safe in their crypto exchange accounts as Orderbook does not accept any funds directly to trade and is also unable to withdraw any funds from customers’ accounts.
As a start, Bitcoin has been selected as Orderbook’s asset for trade as it is the most recognised and liquid cryptocurrency in the world.
How does Orderbook work in a Bearish Market?
One of the most common questions asked of Orderbook is how its AI works in a bearish market.
Firstly, as an automated AI, customers can depend on it to monitor and copy trade on their behalf twenty-four hours a day without feeling worried all the time as everyone’s fear is to wake up in the morning to find that your crypto portfolio had lost half of its value from a market crash the night before.
Orderbook currently adopts a long-only strategy, which means no short-selling. Performance may fall during a market correction. However, as the AI can detect potential market selloffs early, it will then automatically initiate sell orders to reduce the Bitcoin inventory quickly and take advantage to buy when prices are cheaper.
At the same time, the AI will continue to earn spreads by buying low and selling high when market trends sideways. In addition, we do not use any martingale strategy nor take on any excessive risk to recover from losses.
Hence, it can have lower drawdowns and recover losses faster when price rebounds. (A drawdown refers to how much a trading account’s equity is down from the peak that can be either paper losses or realised losses).
Despite being a long-only strategy, Orderbook was able to earn profits in November 2021 when Bitcoin fell more than 20%. In Dec 2021 when Bitcoin fell -30%, Orderbook’s flagship strategy can contain drawdowns within -8%.
Orderbook’s customers have given feedback that our strategy is highly disciplined, and that they felt safe and confident trading with us.
Will there be the use of leverage or short selling?
Currently Orderbook’s current strategy is concentrated on the spot market, and we do not use short selling or leverage.
However, we have been getting requests from many customers for a leveraged long-short trading strategy that can go Long or Short. The strategy can initiate short positions during market corrections to allow for additional profit opportunities. These strategies will also carry higher risks but potentially much higher returns across all market conditions.
This service will be offered to a select group of customers who prefer much higher risks for outsized returns. They will be required to complete a risk assessment before the copy trading of this strategy is availed to them.