1) I know basically nothing useful about market microstructure, but I have one theory for why HFT could hate AMM long-term. Requires a bit of an unnecessary and boring backstory in my old career.
https://twitter.com/QwQiao/status/1316948449628225541
2) I used to trade Treasuries, and Tsy futures. And trading the "basis" for a particular maturity was a very popular trade. Similar to how BTC on Bitmex tracks BTC on Coinbase pretty closely due to arbitrage, so too would, say, the 7yr bond track the futures contract for that...
3) ...maturity (CME product known as the ZN). As a basis trader, the 7yr/ZN was WILDLY popular and profitable. The single most levered up trade in the treasury market due to the liquidity and volume of the ZN. For whatever reason, this trade was my entire firm's bread and...
4) ...butter for years, from at least 2010 when I started trading to 2017 when the trade unofficially died. What was so amazing about this trade was that it was pretty much immune to event risk, so no matter what happened in the world, you could buy dips and sell pops, endlessly.
5) To nobody's surprise, this super simple trade came to be dominated by high-speed algos. When the ZNs moved, it was a speed game to hedge with the 7yrs (or vice versa). Because I didn't work at a firm with the best technology (although we were definitely up there. A game of...
6) ...few winners), we could no longer profit off this trade. In fact, the trade quickly became negative EV. The spread barely moved, and you struggled to buy this spread at the bid or sell at the offer. (Luckily for me, I soon moved on to the crypto scene.)
7) Anyways, this concept of "blindly fading" a mean-reverting spread is what initially attracted me to Uniswap. Very reminiscent of the old days. And *even better*, the strategy was automatic. It replicated my entire old career, and I didn't even have to wake up at 3am anymore.
8) But there was one super key difference to the "Uniswapper" vs my old trading strategy. I got paid for *every* trade. I no longer had to flip these spreads. I earned half my profit on the first trade, and the second half on the roundtrip back up.
9) Execution speed no longer became an issue as a Uniswap LP. I always get to blindly fade my spreads and earn my fees. So now back to my original point: without having to worry about bid-ask slippage or microwave lines for speed, I can make money blindly fading retail order...
10) ...flow, and I'm almost certain this is bad for HFT. HFT can no longer pick off my hedges because I get paid regardless! This cuts into their profits, or HFTs will kill themselves over the speed games, or something along these lines.
11) Now just waiting for big 🧠 to tell me why this entire thread is dumb and/or horribly wrong.
cc @SBF_Alameda @danrobinson @abandeali1
cc @SBF_Alameda @danrobinson @abandeali1
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