Binance, the world's biggest crypto exchange by trading volume, has been approached by many countries for the creation of a "segregated orderbook" (liquidity), but according to Changpeng Zhao, the founder and CEO of the exchange, this is a "bad idea for a number of reasons."
Zhao stated in a Twitter thread Sunday that having large liquidity ranks among one of the "best Consumer Protection mechanisms" as it protects investors against "protects against market manipulation, volatility, and reduces liquidations." However, he believes that creating a separate orderbook for each country will create increased volatility in the crypto market, which is inherently volatile.
"Imagine if we divided the liquidity by 180 countries." he said. "It will make it 180x easier for large traders to swing the markets, and significantly increase the volatility."
Swing traders are those people who invest money to catch a particular trend and their positions last for a shorter time frame. Hence, they take profit within a few weeks to a few months. Hence, swing traders sitting on a huge pile of cash could easily manipulate a segregated market.
On the other hand, arbitrage traders are those that take advantage of minute price fluctuations and as a result, play an important role in bringing the prices to balance. Zhao stated that while such traders might be present to decrease volatility, they are not as efficient as one orderbook and they also "make money in between (which is paid by the consumers)."
"Another misunderstanding people sometimes have: on an exchange, users don’t choose a counterparty. They just trade with the orderbook. You can think of the orderbook as a broker," the head of Binance explained.
Zhao pointed out that large liquidity provides "better prices for users" while offering "tighter spread" and "lower slippage" which he believes is an "important form of Consumer Protection."
Finally, he also revealed that Binance has the "largest liquidity by far" on a global scale compared to other cryptocurrency exchanges.
Binance chief Changpeng Zhao, who goes by CZ, said he used Twitter more than he used his own trading platform and was keen to support it Photo: AFP / Eric PIERMONT
