In-depth analysis of the STG pin incident: market maker liquidity issues and market risk warnings
Bugsbunny2024/12/03 06:46
By:Bugsbunny
Conclusion at the beginning:
Personally, STG's market makers may have encountered some major problems, which sounded the alarm for market makers.
Reasons for STG pin insertion:
STG's insertion is most likely caused by the liquidity withdrawal of market makers. The specific situation may be:
1. Market maker contract expiration: The contract between STG and the largest market maker it cooperated with expired, causing a large amount of capital redemption and the market maker withdrawing liquidity.
2. Market maker system failure: A market maker may have a technical problem, such as a general drop in counterfeit products due to a drop in BTC, requiring Taker liquidity to support the price. During this decline, the market maker's USDT was insufficient to cover all selling/selling pressure.
3. Rapid recovery: After the insertion of the needle, the K-line rebounded rapidly, almost confirming that Binance and other relevant parties intervened in liquidity to help the price recover.
4. Systemic risk of market makers: If a market maker cooperating with STG experiences systemic risk, it may affect the prices of other market-making tokens.
Possible participating institutions
According to the figure at the end of the article, the main institutions involved in STG's pin insertion include Upbit, Alameda, Binance, CRV, Balancer, Bybit, Bithumb, GSR, Kraken, FTX, LFJ, etc.
Based on AKRM data, the main buying and selling orders are concentrated on Binance and Upbit. Upbit has not shown any performance of inserting pins.
According to the PR on February 15, 2023, the market makers of STG are provided with liquidity by GSR, so investors need to pay attention to the statements of GSR, Binance, Upbit and the STG project party.
Real stuff part, why does the market insert needles and what are needles?
Firstly, we need to clarify what "pin insertion" means.
What is the difference between futures pins and spot pins?
In market analysis, we usually need to distinguish between futures pins and spot pins.
Futures insertion: usually refers to the liquidation of "counterparties". The length of the insertion represents the strength of the liquidation. The longer the insertion, the more counterparties are liquidated and the more counterparties are liquidated. Futures insertion generally occurs during the main uptrend of the token.
Why do pins often appear during the main uptrend of tokens?
The rise of a token is actually driven by buying and selling orders. Derivatives such as futures, contracts, and options are mostly brokered by market makers (MM). Before the main uptrend, if there are too many "bulls" in the market, the price increase will lead to excessive profits for these bulls, indirectly understood as: leveraged bulls will cause "potential selling pressure" on the market, thereby affecting the expectation of token rise. The profits of these leveraged bulls are usually the largest part among market participants. And the profits of this part of the bulls are often considered undeserved, because their profits may exceed those of the project party and market makers, which is almost unimaginable. This is what people call the "weight of the vehicle" problem.
Why does the K-line reverse after the price reaches the liquidation price?
Many participants in the market will find that when the price touches their own liquidation price, the K-line usually reverses. The reason is that the liquidation of this part of the "bulls" provides the liquidity needed for token liquidation. When the liquidity of a single counterparty is liquidated or a large number of high-leverage positioning is liquidated, the profits brought by the remaining long positioning will be significantly reduced, which forms the well-known situation of "the car becomes lighter". Afterwards, the market's main force can more easily carry out subsequent rallies, and the common operation method is to "go long on corpses".
Futures Pin Summary
The above basically explains the mechanism of futures insertion. So, what is the reason why STG's insertion this time belongs to spot insertion?
I checked all the trading pairs of STG, including the coin Ernest & Young renewal contract, Binance spot, Bitget perpetual, Coinbase, HTX, Gate, Pancake, Pionex and many other platforms, and found that nearly 90% of the pins occurred on the Binance STG/USDT trading pair. This reminds me of the recent BGB pins incident, where nearly 50% of the pins also occurred on the same platform.
Note: The role and working principle of market makers
The main task of market makers is to earn the spread by providing liquidity and stabilizing market prices. They use algorithms, funds, and technology to undertake the task of matching buy and sell orders in the market, thereby controlling the price fluctuations and depth of the market.
1. The basic principles of a market maker
Market makers provide liquidity to the market and earn the bid-ask spread by continuously providing buy and sell prices (i.e. bidirectional quotes). Market makers bear price risk, but through high-frequency trading and algorithm optimization, they can reverse trade in a short period of time, thereby reducing risk.
Buying and selling quotes: Market makers set buying and selling prices within a certain price range. For example, if the buying price is $100 and the selling price is $101, earning a difference of $1.
Profit source: The profit of market makers mainly comes from the bid-ask spread, that is, they buy assets at a price lower than the market price and sell assets at a price higher than the market price.
2. Market maker's strategy
Market makers often use complex algorithms, fund management strategies, and market data analysis to provide liquidity and earn profits. The following are their main market-making methods:
High-frequency trading and algorithmic trading: Market makers use high-frequency trading techniques to repeatedly buy and sell the same asset in a short period of time, capturing small market fluctuations to profit.
Algorithmic trading: Through highly optimized algorithms, market makers adjust buying and selling prices in real time and dynamically respond to market changes.
Dynamic pricing market depth management: Market makers control the prices and quantities in the order book to ensure that the market remains liquid even when there is significant volatility.
Forecasting model: Market makers use historical data, market sentiment, technical indicators and other information to predict price trends and adjust quotes in advance to respond to market changes.
Active and passive market making. Active market making: Market makers actively provide buying and selling quotes to earn the difference between buying and selling prices.
Passive market making: Market makers make profits by matching market orders, especially when the market is volatile. They may choose to passively wait and match block trades to capture opportunities brought by market fluctuations.
Figure 1 shows the top positions of STG on ARKHAM
Figure 2 shows the Upbit STG trading pair K-line without any abnormalities
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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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