How Commission-Free Markets Increase Liquidity

Author: Dave Reiter Date: 03 Sep 2018

The Digitex exchange will forever alter the manner in which futures contracts are traded.  Let’s meet the CEO of Digitex and explore one of the ways that the firm will change the face of futures trading. Adam Todd is the founder and CEO of Digitex.  Adam is one of the most innovative and forward thinking entrepreneurs within the futures industry.  His ability to think outside-the-box is the main reason why Digitex will push the envelope in creating high liquidity with a commission-free trading market.
Adam has spent the majority of his professional career in the fast paced world of futures trading.  Prior to becoming involved in the Digitex project, he was a pit trader on the floor of the London International Financial Futures & Options Exchange (LIFFE).  In addition to trading on LIFFE, Todd was an incredibly successful sports trader. In order to improve his sports trading career, Adam developed BetTrader, a browser based software application used to increase the efficiency and speed of his daily transactions.
Based on his experience designing BetTrader, Adam has a good understanding of high volume transactions. He also understands the difficulty of making money using high volume aggressive trading strategies.

Digitex Will Increase Liquidity

Arguably, the most important feature of any trading exchange is liquidity. Without liquidity, it would be impossible to successfully operate an exchange. Why? Because traders need ample liquidity in order to immediately liquidate their positions (and expect to receive a decent order fill upon liquidation). If an exchange can’t provide traders with adequate liquidity, traders will simply move to another exchange. As a result, the illiquid exchange will be forced to shut down its operation due to lack of trading activity.  
Liquidity is a funny thing. Exchanges can’t purchase liquidity from a vendor (like they can purchase electronic devices or hire new employees). Instead, liquidity is earned by providing traders with a good experience from the operators of the trading exchange. To a large extent, liquidity is based completely on confidence.  

Traders must feel confident that their exchange will provide enough volume to adequately handle the liquidation of all contracts 24 hours per day. No excuses!

If the exchange fails to deliver the liquidity, the trader will immediately lose confidence in the exchange.  Therefore, from an exchange point of view, this explains why liquidity is the most important feature of a successful operation.
Adam and the Digitex software development team are fully aware that liquidity is an extremely important component of a successful futures exchange.  Therefore, Digitex has included three important features in the overall design of its exchange. Let’s review each feature.

Commission-Free Trading   

Without question, the most important feature of increasing liquidity for Digitex is the adaptation of commission-free trading.  How many other exchanges offer commission-free trading in the futures markets (along with a native cryptocurrency)? The answer is “Zero.” Commission-free trading is the “key ingredient” to increasing the liquidity on the Digitex exchange.
Why? Because traders love the idea of participating in the futures markets without paying commissions and fees. Digitex will be the only exchange that will offer this type of trading experience. Therefore, volume should increase sharply when the exchange opens its doors for business in late-2018. As trading volume increases, so does liquidity.  
Thanks to commission-free trading, Digitex will see a huge spike in activity from high volume traders who use aggressive strategies with a single-tick profit target.  Prior to Digitex, it was not economically feasible for traders to use aggressive strategies because the fees would completely erase the profit potential. Digitex has solved all of these problems for the aggressive trader.  
As a result, Digitex will become an extremely liquid marketplace, as traders are free to use their aggressive strategies without the worry of commissions and fees. In turn, this will exponentially increase the liquidity of the exchange.          
Essentially, Digitex has “cornered the market” on traders who use high volume aggressive strategies.  Thanks to no fees and no commissions, Digitex is the only firm who can offer such services to this group of traders and speculators.   

Automated Market Makers   

An additional unique characteristic of the Digitex Futures Exchange is the fact that it enhances market liquidity by using automated market makers. Essentially, these market makers are automated trading bots with algorithms which are designed to break even. The sole purpose of the trading bots is to create liquid futures markets that have tight bid and offer spreads.
During the DGTX ICO on 15 January 2018, 200M tokens were set aside with the objective of providing a large trading bank of tokens for the bots to employ at their discretion for giving traders plenty of liquidity, even during times of extreme volatility. The use of automated market makers is another great example of how Digitex is addressing the issue of liquidity.

State-of-the-art Trading Interface

The Digitex Futures Exchange uses a one-click ladder trading interface. What’s so special about a ladder interface? If you are an active trader, you know that multiple clicks of your mouse on a trading platform can cause delays and lost opportunities. Digitex provides its customers with one-click trading capability. Additionally, the trader’s computer keyboard is not a necessity when placing a trade via the cryptocurrency trading software. The Digitex trading interface is another example of the firm’s dedication to solve any potential problems with exchange liquidity.     

Personal Observations

During my 29-year trading career, I’ve witnessed several examples of customers losing confidence in a particular company or brokerage firm. As soon as the confidence is lost, the liquidity immediately disappears and the firm is out of business. More often than not, the liquidity is lost as a result of a negative news story or a market-moving event.  
Quite honestly, it really doesn’t matter what causes the liquidity to disappear. The end result is always the same. Traders and investors abandon their positions like rats fleeing a sinking ship. Thanks to today’s lightning fast technology, firms can be completely underwater in a matter of minutes. Once the confidence is lost, it’s impossible to restore it.
Undoubtedly, the most famous case in the futures industry involved the collapse of MF Global. The rumors began circulating about MF Global on 28 October 2011. Less than 48 hours later, client assets were frozen and the company declared bankruptcy on 31 October. MF Global had been in business since 1783. It took less than two days to destroy the 228 year-old company. As usual, the main culprit was liquidity. The lack of liquidity caused the firm to collapse within 48 hours.  
Adam and the Digitex team are fully aware of the necessity to provide constant market liquidity to its traders and investors. This explains why Digitex has spent an inordinate amount of time addressing the issue of liquidity. Personally, I’m most impressed by the firm’s use of automated market makers.  The idea of using trading bots to enhance customer liquidity is an ingenious idea on behalf of the Digitex team. This shows that the Digitex team is doing its best to be as prepared as possible for the launch in Q4.  

Brief Summary of Adding Liquidity to The Digitex Futures Exchange

  • The Digitex Futures Exchange Will be Operational in Q4 2018.
  • Digitex is the first exchange to offer commission-free trading with a native cryptocurrency.
  • Adam Todd is the founder and CEO of Digitex.
  • Adam has spent the majority of his professional career as a speculative trader.
  • Liquidity is the most important feature of any exchange.
  • If traders lose confidence in a trading exchange or company, liquidity quickly disappears.
  • Digitex is conquering the issue of liquidity by offering commission-free trading.
  • Traders who use aggressive strategies will particularly enjoy commission-free trading.
  • Digitex is using automated trading bots to add an extra layer of liquidity.
  • The Digitex trading interface is state-of-the-art.
  • The trading interface will promote increased user activity, thus increasing liquidity.