Deribit operates with trading bandwidth limits in place on all of our instruments. What this means is that there is an upper and lower price limit, a price range in which trades can be executed on any given instrument.
For example, at time of writing, on the Bitcoin Perpetual contract the bandwidth limit is currently set at mark price +/- 1.5%. So if the perpetual mark price is currently at $10,000, the bandwidth limits will be $9,850 and $10,150. For as long as the mark price is $10,000, the traded price cannot exceed these limits in either direction.
What these bandwidth limits do is stop huge deviations away from the current price of the asset (as defined by the mark price).
There are a few reasons why large wicks like that can happen:
- A large trader trying to push the price around (a stop hunt for example)
- An accidental fat finger where a trader mistakenly enters a large order at market, clearing out the order book
- A cascade of liquidations and/or stop losses, possibly as a result of one of the first two reasons
These are usually just temporary deviations away from the ’real’ price. If there is a genuine move in price across all exchanges, then the index will also be moving bringing the mark price and the bandwidth limits along with it. In this way the bandwidth limits are designed to only stop unnatural spikes in price. Any genuine move will automatically be followed by the bandwidth limits as the mark price moves with price.
Exchanges without trading bandwidth limits
The following is an example of what can (and often does) happen on some sites that do not have any type of trading bandwidth limits/circuit breaker protection built into their system. When order books are thin and protections are not in place, it is easy for a trader or group of traders to either deliberately or accidentally cause flash crash scenarios.
This situation will often be compounded by other trader’s stops and liquidations piling on top causing a cascade to prices that are clearly nowhere near what would be considered a fair price for that asset.
As you can imagine, traders that are stopped out anywhere near the bottom in these wicks will not be very happy. They will have suffered heavy losses even in unleveraged positions.
On Deribit, the trading bandwidth limits stop these kinds of flash crash wicks happening.
Futures example
On the limit order form we can see the current bandwidth limits displayed just above the ‘Price’ box.
The ‘MIN SELL’ and ‘MAX BUY’ are the trading bandwidth limits. In this example on the ETH perpetual you can see they are set at $187.02 and $192.71 respectively. What this means is that, unless the mark price moves, no sells will execute below $187.02 and no buys will execute above $192.71.
Note: It is still possible to leave regular limit orders outside the bandwidth limits waiting for price to move there. For instance, in the above example it is still perfectly acceptable to leave a limit sell order at $200. If price moves up to this price naturally it will bring the bandwidth limits with it, allowing buy orders to execute into the limit sell order as normal.
Options example
Much like the futures trading bandwidth limits, the options trading bandwidth limits are displayed as a ‘MIN SELL’ and ‘MAX BUY’ on the order form. They are located just above the box where you enter the price in BTC of the option contract.
In this example we have BTC-27DEC19-10000-C (the Bitcoin $10,000 call option that expires on 27th December 2019), and the trading bandwidth limits are set to 0.1545 and 0.2430 BTC. This means that no sells will execute at less than 0.1545 BTC and no buys will execute at more than 0.2430 BTC.
As with futures, the option bandwidth limits will move as the mark price of the option changes. For example if the underlying price of Bitcoin fell, so would the mark price of call options, bringing the bandwidth limits down with it.
Market orders and trading bandwidth limits
Market orders will attempt to fill the order at the best price possible, moving deeper and deeper into the order book until it is completely filled, without consideration about the price it eventually reaches. So what happens when a market order that is attempting to fill at any price runs into one of the trading bandwidth limits that stop orders executing outside a certain range?
The market order is saying ‘I’ve run out of good prices, I’ll take any price’, and the bandwidth is saying ‘you can’t execute at this price, it’s outside the allowable range’.
When this happens, a limit order for the remaining quantity will be placed into the order book at the bandwidth limit waiting to be filled. In this way it still obeys the bandwidth rules, but also gives the trader’s full order a chance to fill.
You can read more about this in our article on Market Orders With Protection here:
https://medium.com/deribitofficial/market-orders-with-protection-efb3d6eea4b4
For instance, imagine with our earlier ETH perpetual example you tried to place the following market order for $3,000,000.
Remember the bandwidth limits at the time were $187.02 and $192.71. As you can see from the order book a $3,000,000 market buy would take the price well above the upper bandwidth limit of $192.71. What would happen if you submitted this order is the order would execute against every order right up to the bandwidth limit, which would total up to roughly $2 million here. Then a limit order for the remaining ~$1 million would be left at the bandwidth limit price of $192.71.
These bandwidth limits can also be seen via the API with the public/ticker endpoint or the public/get_order_book endpoint. They are labelled min_price and max_price.
You can find the API documentation here: https://docs.deribit.com/v2/#deribit-api-v2-0-0
Summary
The bandwidth limits are important for protecting traders from unnaturally large price spikes.
They offer protection from large, isolated deviations that are not being replicated elsewhere.
The bandwidth limits are not static and will move with the price, allowing regular trading to continue within the normal range.
For the options they also help prevent mistrades, whereby a trader accidentally sells an option for a tiny fraction of its intrinsic value.
Traders on both sides of the market are offered peace of mind, knowing they are trading in a safer environment than exchanges that do not have any of these protections.
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