I assume the algorithm can take into account a 4th factor - buy/sell order imbalances - to reward market makers more for placing orders on the weak side of the book. So 4 factors now include:
1. order size
2. time on book
3. proximity to best bid/ask
4. strong/weak side of book
Thoughts about coding this @abit, @xeroc?
The fourth factor seems "gameable". Someone could place a large amount on the opposite position that their order is on, for a small cost (just a cancel order fee,) effectively boosting their portion of the liquidity pool for fairly cheap. To combat this and other issues consider adding the following restrictions:
A. There should be a maximum percentage away from the price feed that someone can qualify for these awards. This ensures that the funds they put on the books will be at risk of market making (which can be profitable and unprofitable). This makes sure they are providing useful liquidity to shareholders. After all, shareholders are paying for the liquidity fund.
B. A minimum amount of time for each user to have orders on the books in each trading pair separately is also necessary to combat this. Requirement A makes sure they are providing useful liquidity, and subject to market making risks. Requirement B makes sure that they are providing that useful liquidity and subject to market making risks for a reasonable amount of time. It makes sure they are not "farming" the liquidity fund using the method I described above right before the "snapshots" for rewards are taken.
This would need to start with strict restrictions, which shareholders loosen up until a good compromise as to liquidity, spread, and costs is found. All parameters should be able to be easily tweaked.
@CoinHoarder, with #1-3, there is already incentive to place orders on either side of the book. Nasdaq's incentives require placing orders on both the bid and the ask, presumably to promote balance. Which kind of makes sense, although the point of #4 above is to further recognize that in some market conditions it is more risky to be on one side of the book than the other. So the point is to provide more incentive to be on the riskier i.e. weak side in order to avoid a situation where market makers pull their orders in fear of getting steamrolled. At the end of the day, if a market maker wants to put larger orders on the weak side of the book, then that is a good thing and they should earn more. If they choose not to, then they will earn less and that is up to them. I don't see what is gameable about this in particular. If you still disagree with that, can you explain further?
I agree that #4 is useful and should be a part of the equation. I think restrictions should still be implemented in the "liquidity reward system" to increase shareholder's acceptance of the proposal, increase its usefulness to non-participating users (not participating in the "reward system",) and decrease the chances it can be gamed. I feel like implementing restrictions would help in all of those areas.
Let me ask you this. Why should someone be allowed to place an order 50% away from the peg and earn any points towards the "reward system"? or 40%? or 30%? How useful are orders that far away from the peg, really? And why would shareholders want some of the funds going to those who place such useless orders? Obviously, some restrictions need to be in place.
Furthermore, it can't simply be a 25%/25%/25%/25% split for each of the criterion. We need to analyze each criteria separately, and deem which should count for more or less weight. Personally, without thinking about it too deeply, I feel like #3 is more important than #1 is more important than #2 is more important than #4, but this would need a lot of debate to land on something most can agree on.
By the way, I would imagine that determining which side of the book, if any, is weak at any given time is not a trivial matter. Although it really shouldn't be too difficult to take into account a short time-frame running average of cumulative trades at the ask vs. trades at the bid, and perhaps also comparing short-term price delta to medium-term price delta. I would imagine that ultimately people will create bots to most effectively take advantage of these reward factors, which is fine because that means they are putting liquidity where we need it most. Thoughts?
It should not be a problem determining what side of the book is weak. There is a graph of the market depth in the client, so the data points seem to be there and retrievable, but I am not a BTS API expert.
@xeroc probably knows?
Topic: Subsidizing Market Liquidity (Read 74656 times)
