Understanding margin trading platforms: not-so-obvious but crucial aspects
Not long ago, we spent time with CEX.IO Broker support ninjas to learn about their take on building a new margin trading platform under the CEX.IO umbrella. We’ve discussed the platform’s flexibility and user-friendliness, which fit the needs of both beginners and professional traders alike. We also went through some of the important features actively used by the initial beta testers of CEX.IO Broker.
As we are nearing the platform’s public launch, we wanted to take a closer look at what’s under the hood. For this, we will be picking the brains of the CEX.IO Broker technical team. But no worries – they can talk about difficult stuff in a simple way!
What goes into developing a margin trading platform? What is important, and what the team spends the most time on?
For those who just wandered into the article, CEX.IO Broker is a platform for digital assets margin trading based on Contracts for Difference (CFDs). And CFDs are the type of financial instruments that allow traders to trade in price movements of an asset without actually owning that asset.
That means CEX.IO Broker is radically different from CEX.IO cryptocurrency exchange, where the delivery of the traded assets occurs on the spot. In CFDs, there is no delivery at all. Traders open positions at certain prices, which represents their market commitment of a certain size and their anticipation of future price movements. For example, a 1 BTC Long position means a trader is exposed to the price movements of 1BTC and anticipates that the price will go up. With CFDs, the asset’s price difference at the moments when the positions open and close form the traders’ profit or loss.
And with that, let’s get into the questions.
Q: What’s the philosophy about launching CEX.IO Broker in the private beta first?
Margin trading is considered an advanced strategy. While most of the people can understand the mechanics of it, not everyone fully comprehends all the nuances.
For one, CFD is just one type of margin trading setup. With it, a Broker is essentially an intermediary between a client and the market as a whole. The Broker receives a client’s order and sends it over to the market to execute on the best available terms.
In contrast, there are margin trading platforms where the orders are matched within the same platform, peer-to-peer style. Without going into the details, multiple other setups are possible, and each would have its own intricacies.
One step further, even platforms with the same setup – CFD-based for example – they can be designed differently under the hood. So even with the same functionality, a client’s experience of the market will be very different. What we are talking about here is liquidity and how orders are executed.
The latter means the very logic behind the order execution process. The former, in most general terms, reflects the depth of the market on a platform. I.e. number of buy and sell orders at each price. When there is sufficient liquidity available, a trader can execute large orders without significantly impacting the price. When there is a shortage of liquidity, even a slightly larger order may move the market price!
Both liquidity and order execution logic have very practical implications for traders. They affect the spreads (the difference between the ask and the bid), the asset prices, and the timing of order execution.
Add to that the fact that the leverage means providing a user with credit, and it becomes a little more apparent how important risk models are for building margin trading platforms. Fine-tuning the backend logic and the risk models was the idea behind launching CEX.IO Broker in the private beta first. What bugs we might have missed? What can be exploited? Where can we improve?
Over the last six months, we’ve gained a lot of insights into how we can improve the user’s experience of the market. We’ve carefully implemented those insights into the new version of CEX.IO Broker.
And, no we are not sitting under the rock – we’ve seen a lot of margin trading platforms launched recently! Our philosophy here is taken from the military approach: “Slow is steady. Steady is smooth. And smooth is fast.” It means, in the markets such as ours, moving recklessly can be fatal. We prefer being smooth instead!
Q: You mentioned the client’s experience of the market. Can you elaborate more?
Definitely! We can distinguish between the user’s experience of a platform and the user’s experience of the market while using this platform. The former is about features, design, etc. It’s extremely important, but it’s not all it takes. The latter is how the platform enables the user to interact with the market.
Here’s a simple example. Imagine two functionally identical CFD platforms. One of them uses its own liquidity to support the orders and the other – has access to the liquidity of other liquidity providers. Though the trading terminal of two platforms may look exactly the same, an identical order will likely be executed differently on these two platforms.
Suppose it’s a decent order size. If it’s a market order, it will likely execute at a worse price on the first platform (with less liquidity) than on the second. If it’s a limit order, it will likely take a longer time to execute respectively.
Well, you could say “Every platform should be able to find good liquidity providers.” But that’s not all. The way an order is executed, given access to the liquidity, is also important. The question becomes “How will you ensure the best execution price?” Do you split an order evenly between all liquidity providers? Do you send it where the price is the lowest at the moment? Does the size matter? And should there be some logic that makes a decision based on various factors?
You probably guessed it, that logic has to be in place to ensure the best execution price. But here’s a nuance: make the logic too complex and the time it takes to execute the order, provided volatility on the market, can render the logic useless!
So, at CEX.IO Broker we spend a huge chunk of time working out the issues described above. Aside from fixing bugs, the last six months of work resulted in much tighter spreads, which is great for traders. Spreads, as you know, are wide in markets with high volatility and insufficient liquidity. Though we cannot do anything about the volatility of the markets we operate in, we definitely are in a good position regarding liquidity.
Additionally, we’ve dedicated a lot of time to ensure our clients’ orders are executed on the best terms (price and timing) in the market. And that’s definitely what we mean by the good experience of the market that we can provide to the users of our platform.
Q: Aside from spreads and quality of order execution, what else is important for a user of a margin trading platform?
Things that come to mind are the reliability of a counterparty, the usability of the tools, the flexibility of the platform. Though one thing is worth highlighting is that the platform needs to be simple enough for a user to understand what is going on.
With leverage at play, things can escalate quite quickly. The positions can move from profitable to money-losing and back in a matter of seconds – that’s just the market. But the platform needs to be robust enough to immediately reflect the current state of the users’ trades, with the most important indicators visible and making sense.
At any point in time, a user needs to have a clear picture to take in and to react to quickly. Small things, like how Stop Loss and Take Profit are set or how positions are closed, make a big difference here!
Q: What is the CEX.IO Broker superpower?
The fact that CEX.IO Broker is a part of the CEX.IO ecosystem is definitely a superpower. CEX.IO is a spot exchange. CEX.IO Broker is a derivatives platform. The ability to fund both spot and derivative strategies out of one wallet really brings the potential for executing various strategies to the next level.
There is a bit of populism attached to margin trading these days because it gives you 10x (or 100x or 1000x) leverage which can propel the potential gains. Yet, there is another, very important function of margin trading, which is hedging. One can have a long position on the spot market and hedge it with a short position using a derivative platform, such as CEX.IO Broker. Because there is leverage, the amount of capital needed for a hedge is much smaller than if a trader were to open an opposite position outright.
Since CEX.IO and CEX.IO Broker are parts of the same ecosystem, it makes the execution of such strategies simple. Not to mention that the transfers of funds between the two platforms are instant and free!
We are definitely excited to see the way our clients will be able to use both platforms and what new powers they can gain from this!
Thank you, Dmytro Volkov, CEX.IO Broker CTO, and Oleksii Usyk, Solution Architect, for their time, inputs and insights! 😎
Catch more details on applications of margin trading as well as more updates on CEX.IO Broker progress, in the next part of “What’s up with CEXBro, Bro?”
Stay tuned to learn about the public beta release dates and get a glimpse of the behind-the-scenes CEX.IO Broker process.
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