The question of high volumes on Lighter has come up again, so I wanted to share some thoughts. For one thing, we don't incentivize volume and it's not the main metric we track, those are OI and TVL. https://x.com/0xLoris/status/1...
While Lighter has zero fees, bid-ask spreads are not zero, so running a strategy that generates volume without an edge would be -EV and wouldn't earn points either.
We have spent a good bit of time analyzing activity from traders that contribute to a high volume/OI ratio for specific markets. With some exceptions of bad actors that were banned from the private beta, by and large, these were legit MMs and HFTs.
It wouldn't be appropriate to dox these traders, but suffice it to say that among the top 20 most active accounts on Lighter, at least 10 belong to well known quant trading shops. Those are now starting to pay premium fees (as they are demonstrably not retail).
If you do the math, if volume/OI is around 2 or 3, this means that retail traders are doing more intraday activity than they would on an exchange with higher fees. Once you get to 5 or 10, a lot of the trading is HFTs trading with other HFTs.
A few weeks back, someone mentioned that a high volume/OI ratio is "dangerous" - in fact, the opposite would be risky market structure. If you have 100M OI and only 10M daily volume, that means some big positions, if/when they get out, would cause some bad wicks for everybody.
Having a lot of HFTs trade with each other (which, to be clear, is happening substantially less now on Lighter as premium fees are introduced), may not have high diminishing returns, but it's still a net good for liquidity.
In fact, volume has benefits too. For example, if a big trader is looking to get out of a position and uses TWAP (which is generally a good idea), it's a lot easier to do that with low slippage if their volume is <10% of the market volume.
In summary, all of these metrics bring a different angle to evaluating an exchange, and volume, while not the most important, is interesting to look at as well. And conversely, a bad actor with infinite capital can manipulate any metric, however well conceived.
@vnovakovski Both of which are trending up and to the right!
@vnovakovski Insiders are farming airdrop in their 3-4-5th accounts. That is it.
@vnovakovski i would love to see a 2d array of the top 100 wallets with each x,y pair representing the volume matched between wallet x and wallet y and x,x would represent self matching is this or a leaderboard something you would consider publishing?
@0xLoris Seems like a reasonable feature to add to our block explorer, we will take a look at that. To be clear, there is no x,x self matching, that's enforced by the ZK circuits that define the trading rules.
@vnovakovski Hey Vlad one point you haven’t mentioned correct me if I’m wrong, The OI could be the result from deposit cap? If deposit cap raised OI-volume ratio should not be the topic they tryna dunk on anymore ?
@vnovakovski You say this deploy a dashboard so we can check.
@vnovakovski What about sharpe ratio? I always thought sharpe ratio is one of the metric that Lighter team see for point distribution
@kristofferkepin We held a few trading competitions where Sharpe ratio was a factor and those winners received points.
@vnovakovski Who can build, who can’t FUD 🕯️
@vnovakovski Vlad’s ethics in debate are nothing short of epic
@vnovakovski An open trade earns points if it remains open? I don’t like closing position just for the sake of points if I’m still feeling it’ll go even higher, but I also don’t like losing potential points that could harm my total points by the end of the season
@vnovakovski Well explained 🤝🏻
@vnovakovski high volume without depth is meaningless
@vnovakovski This should put an end to the volume/OI chat on the tl, once and for all 👍
@vnovakovski gLighter
@vnovakovski It's always better to increase trading time rather than volume. This will bring your intentions to light.
@vnovakovski Nice explanation
@vnovakovski 🕯️
@vnovakovski lol….next!
@vnovakovski Tge lighter?
@vnovakovski No one could tell it better than you 🕯️
@vnovakovski been following you guys on Lighter since the early days. Good work
@vnovakovski well explained, appreciate the transparency
@vnovakovski My quantitative
@vnovakovski Vlad leading from the front
@vnovakovski Have u got analytics instrument like @CoinMarketMan ?
@vnovakovski Clear explanation, Lighter has established itself as a key player in the market, and the shallow criticisms were bound to happen.👍