High-Frequency Trading Is New Battleground in Crypto Exchange Race

These exchanges join Gemini, which was one of the first crypto firms to offer colocation at a popular data center in the New York area, and is about to expand the option to include a second site in Chicago.

The exchanges' moves are a sign that high-frequency trading, a longtime and controversial practice in traditional financial markets, is slowly entering the crypto sphere.

Though "Bots" have been present in crypto since the days of Mt. Gox, colocation takes algorithmic trading to a different level.

Unlike many crypto exchanges that use cloud-based servers, ErisX has a hardware matching engine, located in the Equinix data center in Secaucus, New Jersey, said Matthew Trudeau, the exchange's chief strategy officer.

The same facility houses the matching engines of a range of major traditional exchanges, brokers and trading firms, Trudeau told CoinDesk, so traders that colocated servers in the data center can connect to ErisX's matching engine there.

In particular, it contributed to the so-called Flash Crash on May 6, 2010, when the prices of many U.S. securities fell and recovered dramatically in minutes, exposing ordinary traders to a higher risk which they couldn't manage as quickly as HFTs. High-speed trading has led to other technical glitches that cost companies hundreds of millions of dollars, the Federal Reserve Bank of Chicago wrote in 2012, noting that "Some high-speed trading firms have equity ownership stakes in certain exchanges."

"Our users know that we monitor for any abusive trading activity. We also continually remind users that there will always be risks when you trade, that is why we strongly recommend users to trade within their means and be mindful of the risks involved."

A smaller exchange tailored for institutional clients, LGO Markets, which launched earlier this year, took the opposite approach, deliberately slowing the trading process for everyone, according to CEO Hugo Renaudin.

"Currently, the crypto market structure is still developing. HFT, in the context of equity and FX markets, does not really exist," said Wilfred Daye, head of financial markets at San Francisco-based exchange OKCoin.

Plus, crypto exchanges are so scattered around the world that there is no point in "Being colocated to one exchange and still having to wait seconds for Binance to update," Weisberger added.