SHOULD THE DEX TRADERS IN THE CHAIN BE WORRIED ABOUT GETTING THE DEAL FIRST

this post is part of our special coverage syria protests 2011

Original: AididiaoJP, Foresight News

Introduction

I've been thinking about large-scale investment portfolios on decentralised exchanges like Hyperliquid。

In theory, if:

• You can get extra gains。
• Your slots and orders are open and transparent, like on a decentrified exchange like Hyperliquid。

So:

• You should have expected a class of traders to try to get away from you before you did。
• They'll do it by pre-empting the slot you want。

The end result is that you will bear a higher transaction cost (sliding point) due to the pre-trading。

Imagine, you want to buy $1 million in bitcoin at $100,000. Someone just hung a million bitcoin bills in $100,000. A runner sees your intentions, intervenes in front of you, eats the bill, then sells you $1 million in bitcoin for $100 million. The extra $100 is a slide point that could have been avoided, if your intentions had been hidden。

Two extremes of the deal

Theoretically, if this situation is pushed to its “necessary end”, almost any form of “serious deal” will be suppressed on a decentralised exchange。

However, we know that this is not the case. Many very professional players trade on Hyperliquid with excess earnings. It is clear, therefore, that the conclusion that "a player with excess profits should not be trading on a centralized exchange" is not so absolute。

Can we, from the rationale, combine existing evidence and draw a visual boundary for the limits of pre-trading

Obviously, if you have a small volume and you trade in highly non-transparent trading places like Bian, your chances of getting ahead are almost zero. Smallness means that your trading footprint (the volume of transactions) is so insignificant in comparison to the market that you are almost invisible; and that, even if your behaviour is entirely predictable, no one can match your specific trading activities (shipping and dealing) with yourself。

On the other hand, on Hyperliquid, the most typical example of a large and highly transparent purse is the HLP vault itself — the open-market vault that provides liquidity to other Hyperliquid traders. I'm pretty sure there's a strategy for HLP-specific pre-trading, and this constant pressure has actually reduced the city Alpha to near zero。

HLP REPRESENTS A RATHER EXTREME EXAMPLE. FIRST OF ALL, IT HAS BOTH THE CHARACTERISTICS OF "EXTREME MASS" AND "HIGH TRANSPARENCY". IT IS SAID TO BE “ABUNDANT” BECAUSE IT HAS A HUGE TRADING FOOTPRINT (E.G., ITS SIZE REPRESENTS A LARGE PROPORTION OF THE DAILY AVERAGE) IN THOSE LONG-TAIL ASSETS THAT ARE NOT LIQUID。

MOREOVER, IT IS "HIGHLY TRANSPARENT" BECAUSE IT IS PRIMARILY A MARKETER AND SEEKS TO ACHIEVE THE EXPLICIT PURPOSE OF LEVELLING EXISTING STOCKS AT A PREMIUM BY PROVIDING LIQUIDITY. THAT MEANS THAT AS LONG AS THERE'S A "BIG" SLOT ON HLP, YOU KNOW IT'S BOUND TO NEED TO LEVEL IT. WORSE YET, YOU CAN SEE HLP EVERY SILO AND EVERY WALLET. THIS MAKES IT POSSIBLE FOR YOU TO ADJUST YOUR PORTFOLIO TO SELL IT TO HLP MORE CHEAPLY, AND VICE VERSA, WHENEVER YOU SEE THAT IT NEEDS TO BE BOUGHT TO LEVEL THE GAP。

ALL OF THESE CHARACTERISTICS MAKE HLP A PARTICULARLY ATTRACTIVE TARGET FOR PRE-TRADING, WHICH IS NO DIFFERENT FROM THE PRE-TRADING OF EXCHANGE-TRADING FUNDS BECAUSE OF THEIR STRICT COMPLIANCE WITH INDEX ACCOMMODATIONS. IN HEDGE FUND CIRCLES, IF YOU REALLY USE THE WORD "PRE-TRADING", THE COMPLIANCE DEPARTMENT WILL MARK YOU IN EVERY DIMENSION; THE INNER SAYING IS THAT THE INDEXING TEAM IS VERY GOOD AT PROVIDING THESE ETFS WITH A "PRE-JUDGED LIQUIDITY REQUIREMENT AND EARN A PREMIUM FROM IT."。

How did that deal happen

In a classic front-runner transaction, one market participant knows in advance what another market participant is going to do and then takes a series of actions to benefit from this information。

For example: If I am an insurance agent, and I know that my very wealthy client intends to buy a $1 billion stock with a bad liquidity stock throughout the trading period today, then when the transaction is opened, I will present a $1 million market price bill, and the same price bill at the time of receipt。

By knowing the intentions and actions of my client, I was able to make a deal with him before he was able to raise the stock price and earn the difference. This is highly illegal because I:

• It's based on insider information
• In violation of my fiduciary duty
• They benefit themselves at the expense of their clients。

However, this is a good example, because it is clear that I am able to profit only because I know the intentions and actions of another market participant and can anticipate the results of those actions, thereby putting myself in a good position。

Every day, a front-loading transaction takes place on a smaller scale and at a lower level of violation. Transactions algorithms do not need to be informed to extrapolate intent, and they take advantage of open information (mounting, transaction, position) accessible to everyone. They then anticipate the outcome of market behaviour triggered by this approximation of intent and decide whether to take action on the basis of the expected value of a “soldier deal”。

It follows from this that the transparency of your "intent" and the degree of disclosure are the primary determinants of whether you will be easily ahead of the deal。

Gradient distribution of pre-trading transactions

OKAY, NOW WE KNOW THAT IF YOU'RE SMALL AND YOU'RE NOT TRANSPARENT ON THE TRADING PLATFORM, YOU DON'T HAVE TO WORRY ABOUT GETTING AHEAD OF THE DEAL BECAUSE NO ONE CAN JUDGE YOUR INTENTIONS. SIMILARLY, IF YOU'RE BIG, TRANSPARENT ON THE TRADING PLATFORM, AND YOUR INTENTIONS ARE VERY TRANSPARENT (E.G. HLP), YOU'RE DOOMED TO LOSE YOUR GRIP。

These extremes, however, have little reference value to the vast majority of traders. We're more concerned with the middle zone. As noted above, what ultimately determines your tendency to be robbed is how transparent your intentions are。

Even if you're big and trading on a non-transparent exchange, it's not easy for others to be ahead of you. Your orders, as part of the daily trade volume, are shown as "big single footprints", but it's not easy to attribute all orders to a "single subject" unless you have a very transparent way of dealing-- - For example, you don't have any randomization, you trade with a fixed hand number or a fixed nominal value, or you send a split in a very certain pattern (for example, every 30 seconds)。

If you can hide your intentions — for example, the size of your transaction is random, the time when you send the splits is random, the time is random and the time is random, and the amount of the bill is too large in relation to the daily transaction or the order book — it is difficult for others to attribute your order to one person. Markets may be aware of a large amount of buying interest from the general point of view, but may not be able to attribute such buying interest to a certain knowledgeable party that holds the proceeds of Alpha, and thus may not price liquidity accordingly。

Fortunately, we can actually extend this to a transparent exchange. Despite the large number of vaults on Hyperliquid and Lighter and the relative transparency with which they operate, it is not easy to really pre-empt these vaults。

The conclusion is, unless you're quite large (e.g. managing the institutional vaults of hundreds of millions of dollars), you have little to worry about getting ahead of the deal。

Limitations of pre-dealing

attempts to obtain alpha proceeds from pre-emptive transactions without violating the law are in itself a practice of alpha tactics. you model your intentions on the basis of open information (stamping, transaction, position), which in itself entails model risk。

the hanging order, deal and position may be visible, but the intention is not. a price limit bill hanging there may represent alpha proceeds, may represent stockpile management, or may represent hedges. those models that assume that there are alpha returns behind each order are depleted by countless miscalculations。

plus, even assuming you can extract your intentions with relative accuracy. even so, alpha proceeds themselves are not " almighty." all alpha returns have some statistical noise, and your portfolio is exposed not only to alpha returns, but also to model risks associated with misinterpretation of certain behaviour as alpha returns。

you might say that if i were blindly to copy the target's operation, i would certainly capture all the alpha gains -- but the problem is that it exposes you to the risk of being exploited. if you send the same purchase price each time you're on a target, then when the target wants to sell it, you can put up a limited purchase price and watch you hang the same one, then you can take it off and sell it back. so, you see, unthought-out pre-trading is a loophole in itself。

it should also be remembered and recognized that alpha gains have time horizons. some alpha gains are quickly lost and the attackers may not be able to use them themselves (e.g. single alpha for high-frequency transactions); others are very long and the attackers may give up because they do not want to take that long risk with you (e.g. several days or weeks of rebalancing transactions)。

Finally, even if you have an extremely sophisticated front-runner staring behind you, in fact, it's just a few basis points. If you really have sustained alpha gains, many strategies can fully absorb the additional costs of these bases。

How can you not be an easy target

even knowing that it's not that simple, as a smart market participant who can generate alpha gains, your task remains to hide your intentions and make it as difficult as possible for the attackers to get away from you。

You can do a lot of things, with different levels of complexity and effectiveness. The first thing you should do is collect telemetry data and logs in a dedicated manner so that you can quantify the exact "level" of your being robbed (if it does exist). You can do this by analysing a large number of sample orders and transactional tag prices, slide points and impact costs。

then, once the data are available, you can take a series of defensive measures. a common thread of these measures is that it is less obvious whether you want to buy or sell, how much you actually want to buy or sell, how much you want to buy or sell, and whether you want to buy or sell at the level of urgency, or whether you are trading at the alpha warehouse or at the scramble。

Some simple ways of blurring your intentions are to hang bilateral offers simultaneously, to use random sizes and to operate at intervals that are not always certain。

a method (high-level, complex) that can effectively blur your position is to split your portfolio into multiple wallets, to keep the inside of each wallet sufficiently neutral, and each of them is "guaranteed" efficient. inside each wallet, you have both a position to generate alpha returns and a position to the flush. some of the wallets are 80% alpha plus 20% for the swarm; others 80% for the swarm plus 20% alpha. over time, you rotate the "type" of each wallet and randomly introduce new wallets and eliminate old ones。

This means that if the assailants follow only one of the wallets, they may end up following a wallet that is mainly hedged, thus falling into positions of loss created for hedge purposes. If they follow all the wallets, you can further blur your real intentions with a series of contradictory operations. Let the reader imagine what it would look like

Finally, a number of (external) solutions to this problem already exist on the market. Personally, I have not used it, but in terms of core principles, they address privacy in one of two ways:

Gather the orders together, set them up internally, then put the rest of them on the central exchange, and then place the position back to you. This is no different from the central liquidity books in hedge funds that consolidate the orders of the various strategic groups and then assign positions back to them。

Split your orders into multiple wallets with those of other users of the program, perform them on the go-to-centre exchange, and then return the position to you。

Conclusions

If you're a small-scale dealer, even on a transparent de-centre exchange, you probably have nothing to worry about. Pre-dealing has its own limitations, making it difficult for others to really profit from your loss。

that said, as your transactions grow in scale and the quality of alpha proceeds improves, it naturally inspires the runners to stare at you. at that point, you should invest more resources to blur your intentions and make their lives as sad as possible。

In any case, the problem is not a "resolved" one, but it will be an ongoing "cat-rat game" for any institution or trader who deals on a large scale in an open, decentralised and transparent mobile location。