BitMEX is taking its overload problem seriously.
The Seychelles-based, king of crypto derivatives has seen some of the most action in the nascent market, overseeing as much as $10 billion in trading a day. Still, when demand is high the system is known to overload, resulting in the cancellation of client orders en masse.
BitMEX has long been haunted by the overload problem (and the memes associated with it), but it has become a point of discussion among trading desks as “Crypto Winter” thaws and crypto trading volumes spike. Indeed, the firm released a blog post on Thursday outlining the large scale overhaul of its trading architecture. The firm said it had improved its platform’s capacity by 70%, admitting there’s more work to be done.
“While we are proud of the platform’s success and thankful to our users, we need to continue to improve in order to be viable in the years to come,” BitMEX said in the blog.
To that end, the firm is halting the development of any new products until its overload problem is completely fixed, sources familiar with the matter told The Block. Still, the problem has allowed one tiny competitor, Deribit, to cut into some of its massive market share.
So what’s the problem?
For investors speculating on Bitcoin price, the failure and even delays in placing an order mean that they miss the opportunity to take a position at their desired price, which leads to a loss in profit. One institutional investor told The Block that on average, they receive 50 to 100 error messages per day.
As a response to this daily frustration, some professional traders are reducing their trades on BitMEX and switching to Deribit, a latecomer to the derivatives market, according to sources that use BitMEX for trading. Meanwhile, the upstart venue confirmed that it is experiencing an influx of users, possibly due to the recent bull market and BitMEX’s persisting overload problem.
“Some people say they want to be able to rely on an exchange when they put their order in, for example, and that is the reason they are switching to Deribit,” said Deribit COO Marius Jansen. “But I also see a big influx of new users who are just going into derivatives.”
As the overload problem persists, there have also been many speculations on Twitter, Reddit, and other social media platforms that the firm actually gives unequal access to traders. After all, if some orders get backlogged, it must be the case that some others are being processed.
BitMEX noted that 80% of orders will be rejected if the number of orders entering the system is 5 times what the system can handle. However, according to an institutional trader, when the site gets busy, it is not possible to place any order.
BitMEX said in Thursday’s blog post that these accusations are “fundamentally untrue: every single trader on BitMEX has equal access and enters the back of the same queue.”
A quick fix?
Surely, when market demand hits, all exchanges are under pressure to process large amounts of orders. Deribit has also experienced system lagging when investment interest in Ethereum grew faster than it anticipated. However, “we did throw in a new server and the problem was solved,” Jansen told The Block.
If the solution is as easy as getting a few more servers, why hasn’t BitMEX fixed its overload problem already?
In BitMEX’s defense, adding servers or upgrading its trading engine are not effortless tasks, especially for a firm as large as BitMEX. The database, programming language, software that BitMEX built its platform on are all factors that determine how difficult it is to update the system capacity, according to Jansen.
BitMEX stated in the blog post that horizontal scaling, which is a fancy way of saying adding more servers, does not work well for them because they have to process orders in the First-In-First-Out sequence, which limits the trading engine’s ability to handle trades in parallel.
However, BitMEX is not the only firm that has to process its trade orders in sequence of arrival. Jansen said Deribit has been able to process orders sequentially without experiencing the limitation that BitMEX described in horizontal scaling.
“Since day one, Deribit was built in a way it can handle multiple process orders at the same time. This makes our exchange perfect for horizontal scaling: more machine power means more process orders at the same time,” said Jansen.
As more firms like Deribit are offering perpetual swaps, BitMEX might lose some of its dominance.
Liquidity makes BitMEX KING
Still, there is something BitMEX has in its favor that is not to be understated: liquidity. For many traders, the deep liquidity BitMEX has — which enables them to move in and out of positions with limited slippage — is a big incentive to keep them on the platform.
BitMEX sees $3 billion trade hands in a given day, whereas Deribit sees just $400 million trade over the same period.
Liquidity, as one market observer noted, is “systematically important.”
“So unless they are shut down by regulators, Deribit is always gonna be #2,” they contended.
BitMEX declined to speak to The Block for this story through spokeswoman Amy Longo.