Differences Between Forex and Cryptocurrencies - Limit Orders

This is my first article on the main differences between the Forex and the cryptocurrencies markets. As a trader in both of these markets, I feel that I can offer some unique insight that may help newcomers to the forex market coming from bitcoin trading, or vice versa. In this article series, I plan to outline the major distinctive features of these two global marketplaces. I will start with one of the major differences between the forex and the bitcoin markets, limit orders and the way they’re treated in both trading venues. Most Btc exchanges function as middle men, matching buyers with sellers. Unlike traditional forex brokers, on a bitcoin exchange you are trading against other traders not against the broker itself. The exchange house doesn’t make the spread, individual traders do. Because the exchange is not involved in market making, there is no need to restrict traders from taking positions inside the spread. So far so good. This is somewhat similar to forex ECN accounts. Where the situation starts to differ is in the way limit orders are treated. On retail Fx ECNs, your limit order is usually not an actual limit order but a limit that turns into a market order at your specified price. Let’s use an example to better explain my point.

Say that the EUR/USD is quoted at 1.3500/1,3502 ( bid/ask ). Now say that you place a limit order to buy at 1.3501 with broker X. Some brokers will change the spread to 1.3501/1.3502 to include in your bid, most won’t. However, even the brokers that place your bid at the top of the queue will not transmit your limit to the larger interbank forex market. Only other customers of forex broker X will be able to see and sell to the 1.3501 bid. Other traders or banks that are not trading with broker X will still quote the Euro at 1.3500/1.3502. In order to have your limit executed, the ask price of the EUR/USD has to move lower from 1.3502 to 1.3501. Then a market order gets issued on your behalf to the interbank.

On bitcoin exchanges everyone can see and ‘’hit’’ your bid. The current spread on BTC-E for BTC/USD is 820 / 820.03. If you put in a limit order to buy at 820.01, the bid / ask spread will immediately change to 820.01/820.03. Now, the next person that wants to sell his bitcoins and uses a market sell order to do so will be matched with your bid. While this may not seem like much at first glance, buying on the bid and selling on the offer can not only ‘’save’’ you the cost of the spread but also allow you to recoup some of the exchange fees in the process.

Get paid for limit orders

Similarly to the practice seen at some stock trading ECNs, you can now get paid for your limit orders when trading bitcoins. The so called ‘’market maker’’ rebate is a very rare practice in retail currency trading, at the moment MBT Forex are the only forex broker that offers a similar option under their pay for limits plan. 1) MB Trading will charge $2.50 per 100,000 of the base currency for Market orders. For so called ‘’non-marketable limit orders’’, the company will rebate the client $0.5. Because take profit orders fall under limit orders, if you enter your trade by a limit order and exit with a take profit, instead of paying $5 to MBT, you will get a rebate of $1 per 100,000. The disadvantage of using limit orders is that you will sometimes miss trades. A limit order guarantees the price, not the execution.

For example, let’s assume that the EUR/USD is currently quoted at 1.3010 / 1.3012 and that you place a limit order to buy the Euro at the current bid plus 1 pip. Now the quote will switch to 1.3011 / 1.3012. The next person that wants to sell the pair right away and uses a market order to do so will be matched with your bid, because it is currently the best price on offer. However, the currency pair could just rise to 1.3014 without anyone ‘’hitting’’ your bid. In this situation, if you still want to get into a long position you would either have to issue a market buy order (and pay the spread plus the commission in the process) or set another limit at just above the new bid, risking another non-executed trade. In conclusion, the pay for limits offer looks like a good idea at first glance, but you could easily find yourself in a situation where the trades that get executed at your bid are the ones that continue to move in negative territory while at the same time you would miss opportunities where price moves fast in a runaway market leaving your bid in the dust.

BTC China, the fourth largest bitcoin exchange by daily volume, unveiled a similar ‘’pay for limits’’ offer a month ago. The new fee structure was published on January 3rd 2014 2). Under the plan, ‘’market takers’’, those wanting to get in the market right away with a market order will get charged 0.3% while ‘’market makers’’ (limit orders) get rewarded with 0.3%.

Speaking to CoinDesk’s Editor Emily Spaven, the CEO of BTC China, Bobby Lee had this to say about the new cost structure: ‘’We are giving the fee to the market makers: the people who put in a limited order, waiting for you to buy or sell your bitcoin. We feel very confident and we hope to dominate the market with this model.’’ 3)

The ever adjusting marketplace

I know what you’re thinking. If I can get paid 0.3% on entry and 0.3% on exit, I can make 0.6% on my trade even if price doesn’t move a single tick in my favor. Now if I do this 10 times a day, I’ll make 6%. And if I compound my gains I’ll make…Soon after that you start imagining making millions. But of course it’s never that easy. Not long after the market maker rebate announcement, large traders started to monopolize the spread. By the time this article was written, January 21st, large blocks on both side of the spread became common. Currently, the spread on BTC China is almost constantly at 0.01. This is the closest the bid and the ask prices can get without executing. Currently, the BTC/CNY is quoted at 4999.99 / 5000.00. Here is a snapshot of the current bid/ask spread on all major bitcoin exchanges, taken from Bitcoincharts.com.

Notice that BTC China currently has the lowest possible spread of all major exchanges. Bobby Lee’s plan to entice market makers obviously worked. However, the large blocks on each side of the bid/ask spread make market making by the average retail trader unpractical. It will take a large one sided move to exhaust the $50,000 US Dollars covering the spread and if this happens, you wouldn’t want to be left holding the bag. While you probably won’t profit much from BTC China’s rebate scheme, you still get to enjoy fantastically low bid/ask spreads on account of new fee structure change. Even if you use market orders for both entry and exit, the most you would pay is 0.6%. Not a bad deal in the btc trading world. This is the second lowest fee after btc-e’s 0.4% (2 x 0.2%). But keep in mind that the spread on btc-e adds 0.1 to 0.2% on top, so you usually end up paying about the same.

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