Algorithm Wars: Decoding OKX and Binance's Perptual Futures Trading Strategies

Introduction

Many traders may have noticed that the same Perptual Futures trading pair performs differently on different platforms. For example, one trading platform offers leverage up to 75 times, while another platform can only go up to 20 times. At the same point in time, there are also differences in price and funding rates between the two platforms. These differences are not targeted at specific users, but stem from the underlying Algorithm differences.

Perptual Futures Trading Core Elements

Perptual Futures trading is primarily determined by three key factors:

1. Index Price
2. Mark Price
3. Funding Rate Algorithm

In short, the mark price and index price together form the core algorithm mechanism that determines the "contract price," while the funding rate algorithm determines the flow of funds among traders.

Comparison of Algorithms between Two Major Platforms

The algorithm design of a certain trading platform makes its Futures Trading more volatile, and the coarser granularity further exacerbates the fluctuations. In contrast, the algorithm design of another platform is more robust.

Index Price

The index price is the weighted average price of the spot market. To prevent anomalies, the system will perform "smoothing processing":

• Certain platform: ±5%
• Another platform: ±2%

In extreme market conditions, the index price fluctuations of the former are greater, with higher risks and returns, and the market responds more quickly.

Mark Price

The mark price is the most critical price in Futures Trading, directly affecting the liquidation risk. Its calculation formula is:

Mark Price = Index Price + Basis

There are significant differences in the marking price algorithm between the two major platforms:

Algorithm of a certain platform:

• Only refer to the "Buy 1" and "Sell 1" prices of the contract.
• Without considering the order book depth, the volatility is greater.
• Prices are closer to the market, and the difference between spot and futures prices returns to normal more quickly.

Another platform's Algorithm:

• Consider three prices: weighted price, the mid-price of buy 1/sell 1, and the actual transaction price.
• Take the median value of the three as the mark price
• Smaller fluctuations, stronger stability, but slower convergence speed of futures and spot prices.

Funding Rate

The funding rate is a mechanism to balance the prices of futures contracts and spot prices. The two platforms also have differences in their funding rate algorithms:

A certain platform:

• Calculate based on the difference between the futures trading order book price and the spot index price.
• The upper and lower limits are set at ±1.5%
• Set the lending interest rate to 0

Another platform:

• The algorithm is more complex, with limits set at ±2%.
• Consider the borrowing interest rate (default 0.01%)
• Introduce the concepts of "Premium Index" and "Impact Price", referencing the overall order book depth.

Precision Design

• Accuracy on the platform: 0.0001, the minimum order unit is relatively large, and the price fluctuates quickly.
• Another platform precision: 0.000001, price changes are more delicate

Trading Strategies Under Different Algorithms

Due to algorithm differences, the two platforms have developed different trading methods:

A certain platform:

• Easier to pin, higher volatility
• Suitable for short-term wash trading, quick in and out
• Arbitrage is more aggressive

Another platform:

• It is more difficult to drive price fluctuations, and the trading cost is higher.
• Suitable for gradual layout and stable position control
• Arbitrage opportunities are harder to trigger, but more persistent.

The Impact of Algorithms on the Launch of New Perpetual Futures

The design of the algorithm significantly affects the decision-making process for exchanges to launch new Perptual Futures. The mechanism of another platform is more suitable for launching new Perptual Futures because:

1. A smooth price mechanism reduces the risk of severe volatility.
2. Depth-driven funding rate algorithm can effectively reduce extreme profits and losses.

In contrast, a certain platform poses higher risks when new coins are launched, potentially leading to severe fluctuations and liquidation risks.

The Financial Philosophy Reflected by the Underlying Algorithm

The algorithm design of the two platforms reflects different financial philosophies:

A certain platform:

• Reflect the "Volatility Philosophy", believing that the market is driven by human nature.
• Similar to behavioral finance and market structureism
• Attract traders who are skilled in rhythmic combat and dare to gamble.

Another platform:

• Reflect the efficient market hypothesis and the ideas of quantitative finance.
• Believe that the market will trend towards equilibrium in the long term.
• Attract traders who rely on systematic arbitrage and risk management.

Conclusion

This algorithmic dispute is not only about trading strategies but also reflects different understandings of the essence of the market. When traders choose a platform, they are also choosing a philosophical attitude towards the market. Regardless of which platform is chosen, it is crucial to maintain a sense of reverence for the market.