Pips mechanism, essential to the cryptocurrency market?
The Pips mechanism was previously mentioned. Type A pips mechanism sets the highest pips size in the whole market, which is beneficial to market makers and other liquidity providers. Correspondingly, Type A pips mechanism needs to balance the needs of different market participants.
We believe that trading threshold and leverage level are the main strategies for Type A pips mechanism.
Lower the threshold
In the traditional market, there is an assessment standard to qualify investors. High-risk derivatives require more personal wealth, more investment experience, and conditions of a higher standard to meet in order to enter the market.
The higher the threshold, the fewer the qualified investors, and the more the speculative demand is suppressed. Conversely, the lower the threshold, the lower the speculation costs, and the greater the speculative demand.
The main threshold that can be controlled today is funding (relative to compliance and access methods, etc.). low amount and high frequency , which bear the resemblance to gambling games, are relatively more friendly to traders, but encourage speculation and reduce platform risk.
High leverage
The level of leverage adjusts risks and returns. The higher the leverage, the greater the risk.
The risk of losing all margin (forced liquidation) is inevitable whatever the leverage is, but differs in possibility. The higher the leverage, the more likely the forced liquidation is, but there is no linear relationship between the level of the former and the number of the latter. However, the frequency of forced liquidation resulting from high leverage is relatively higher than that of forced liquidation resulting from low leverage.
When a forced liquidation is triggered, its final execution price cannot be determined by the liquidation as the margin is very limited. Thus, platforms bear the risk of loss if there is no special agreement between investors and platforms.
Comparative analysis of two pips mechanism
The comparison between Type A pips mechanism and Type B pips mechanism shows that they both adopt a mechanism to avoid loss during forced liquidation. These are the liquidation allocation mechanism and the forced liquidation matching mechanism (similar to China’s futures: the 3rd stop limit forced liquidation rule).
Under the premise of ensuring safety, they differ greatly in their leverage settings.
Type B pips mechanism, although setting the corresponding rules, adopts a conservative leverage policy in traditional trading platforms without similar terms, while Type A pips mechanism gives investors the greatest leverage in the market.
As previously mentioned, Type B pips mechanism is not friendly enough to market makers while Type A pips mechanism encourages them. As a whole, Type A pips mechanism triggers a relatively small number of forced liquidation, with less a violent impact on costs (under the condition of good liquidity, the more there is forced liquidations the more dispersed the price is), and in more dispersed directions. Therefore, while Type A pips mechanism is in a position to release risk continuously, and is well-prepared to face risks, Type B pips mechanism concentrates risk and depends on forced liquidation allocations to maintain operations.
Conclusion
To sum up, Type A pips mechanism is more reasonable than other pips mechanism in terms of pricing rules. It is recommended that frequency, direction, and impact components of the forced liquidation be included as monitoring indicators of trading platforms’ management system. It is advised to start by providing high leverage and low threshold, monitor the impact of relevant rules on business indicators, and adopt a systematic management style.
Bybit is committed to bringing a revolution in today’s cryptocurrency market by combining the best of cryptocurrencies and traditional finance to bring about the industry’s safest, most reliable, fairest, and most user friendly trading platform. Bybit spurs market-making behaviors by setting a minimum pips of 0.5, has super low fees, and high liquidity incentives. Bybit protects and propels the enthusiasm of market makers to provide better liquidity on its trading platform.
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