BitMEX is proud to launch its first optionality products: UPs and DOWNs. This marks a very significant milestone in the product development history of the platform. With futures, swaps, and now options, BitMEX is inching closer to the goal of offering all manner of derivative products for the crypto-coin industry.
Why UPs and DOWNs?
UPs or Upside Profit Contracts, and DOWNs or Downside Profit Contracts are similar to call and put options. One of our biggest strengths at BitMEX is in engaging with the community and listening to our customers, and we have heard the roar for such products as the level of sophistication grows in this industry.
The liquidity profile of Bitcoin derivatives trading has changed dramatically over the past 12 months. The BitMEX XBTUSD Perpetual Swap is now the most heavily traded instrument in the entire crypto trading industry. Average daily trading volumes are in the billions of USD notional.
Before non-linear products like options are viable, linear products (Perpetual Swaps and Futures) must be sufficiently liquid. Given the liquidity profile of XBTUSD and the quarterly Bitcoin / USD futures contracts, we now believe there is sufficient liquidity in order to launch a successful options product.
What’s the Use Case?
Imagine Bitcoin is currently trading at $10,000 and you believe that by the end of the week, it will move 10% higher to $11,000. However, you don’t want any exposure to the price unless it hits your target. Also, you do not want your position to be liquidated before your target is reached, irregardless of the intra-week spot movements. For example, if the price drops to $5,000 but recovers to $12,000 by the settlement date, you will still profit and will not be liquidated.
Hence, you want the ability to participate above your target of $11,000 on the long side. The UPs product allows you to express this view, however this “optionality” comes at a cost which is the premium you pay to the seller of the option.
Why Can You Only Buy?
Selling naked (i.e. unhedged) options is one of the fastest and easiest ways to financial ruin given the potential for unlimited losses. On BitMEX, traders are limited to the margin they deposit on the platform, hence if the seller of the option cannot make good on potential losses, then socialised loss systems will need to be put in place which we want to avoid. As a result, we require sellers of the options to post the full notional value of the UP or DOWN contract.
Because no leverage is offered to sellers, it is very expensive from a capital perspective to make a market. In order to guarantee tight spreads at sufficient size, the BitMEX affiliated anchor market maker will be the only entity allowed to sell options initially.
Many of you may have concerns that the BitMEX affiliated entity is the sole market maker, however here are some points to consider:
- As further discussed below, one cause of the engine overload issue is that we have many market makers constantly updating quotes on currently listed products. This consumes a vast amount of precious engine capacity. Until our engine performance is fixed, we refrain from listing any new product that exacerbates the issue. (E.g. this is one of the reasons why we delisted a number of our quarterly altcoin futures contracts, since the volumes they generated did not justify the engine resources consumed.) Hence, if only one market maker quotes on the UPs and DOWNs product, then the impact will not be meaningful on the engine.
- The UPs and DOWNs products need to be fully margined. That is, buyers must pay the premium in full and sellers must post the full notional of the option in margin. That means that irregardless of where the price settles, neither buyers nor sellers will ever be liquidated. If the contract settles in the money, buyers are assured they will always receive their profit. Furthermore, this means that the anchor market maker cannot manipulate the UP or DOWN market in any way to liquidate any customer.
- The anchor market maker is tasked with keeping a tight market so that buyers can enter and exit trades as they wish throughout the contract’s length. We want to increase liquidity, having wide markets or an empty order book is not in BitMEX’s interest.
- As we respond to customers’ feedback about the products, changes will be made to the UPs and DOWNs contracts. The anchor market maker will be able to adjust to the new product structure faster than any third party. That means that we can fail fast, and relaunch the product quickly with guaranteed liquidity.
What Are We Doing About Engine Performance?
At BitMEX, our top priority is improving the performance of our engine. In a detailed blog post, BitMEX Technology Scaling: Part 1, our CTO Samuel Reed explains in detail the issues we face and what we are doing to resolve these issues. However I will reiterate some points here.
The solution is not as simple as adding more servers or more engineers. The engine has a maximum throughput that is constrained by risk checks and calculations which are performed on each order, position, trade or price change so that we can maintain mathematical consistency on a platform that allows for 100x leverage. We have a two-pronged strategy to solve for this unique problem that BitMEX experiences:
- Optimise as many existing functions as possible to obtain efficiency gains. We have been rolling out improvements weekly; however, that extra capacity is consumed very quickly as the demand increases to match engine performance improvements.
- Re-architect the engine from the ground up so that the aforementioned issues can be scaled horizontally which will allow for more products and more users without overload issues. This work is ongoing, it won’t be solved overnight, but we are working towards this goal.
I want to emphasise that we will not list any products that worsen engine performance until we increase capacity sufficiently.
Additionally, we are scrutinizing which API users cost us the most in resources. Further API rate limits on traders with non-optimal Quote / Trade ratios are forthcoming. I remember how hard I fought as a CEO to convince traders to provide liquidity on our platform. This action pains me deeply and further sharpens my focus on finding a solution to this problem so that anyone who desires to provide liquidity may do so.
Launching the UPs and DOWNs products does not mean that BitMEX has forgotten or ignored the overload issue. Rather, we must continue to launch and test new products within reason so that in a year’s time we have another wildly successful product like XBTUSD.
If you are a talented engineer who believes he or she has a solution to this problem, we want to hear from you / hire you. Please reach out to us via the careers page or email, and a senior member of staff will review your qualifications or suggestions.
– Arthur Hayes, CEO and co-founder