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Managing Large Bitcoin OTC Orders Under Price and Volatility Constraints

Article Quant Q&A · Author: St Vincent
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Summary

The document presents an interview scenario in which an exchange OTC desk must handle a corporate request to trade a very large quantity of bitcoin within a narrow band around the mid-market price. The requested size is several times the exchange’s stated average daily volume, and recent volatility is described as elevated. The question is how a trader should execute while controlling market impact and the desk’s exposure.

The author recognizes two central risks: executing the full amount at once could move the market, while quoting or selling at an unsuitable price could leave the exchange exposed if the market moves. Splitting the order into smaller trades is suggested as a possibility, but the document does not settle on an execution plan or provide evidence comparing alternatives. It is a discussion prompt rather than a tested strategy; inventory, hedging capacity, liquidity across venues, client constraints, and execution timing are not analyzed.

Key ideas

  • A requested bitcoin trade can be large relative to the exchange’s daily volume.
  • Executing the full order at once may create market impact.
  • A price move after execution can expose the OTC desk to losses.
  • Splitting the order is raised as a possible response, but the document does not evaluate or endorse a specific execution strategy.

Tags

CryptoExecutionMarket microstructureRisk management
Full text
# Trading a large sum of bitcoin OTC


# Trading a large sum of bitcoin OTC












I was asked the following question at an interview:

> Suppose that you're an OTC trader for an exchange that trades bitcoin. What would you do in the following scenario? A large corporate investor wants to initiate an OTC trade for $50,000$ bitcoin (BTC) to be guaranteed at a price within $1\%$ of the mid-market price. The average trading volume on the exchange is $10,000$ BTC/day and volatility has been above average the trailing two weeks (BTC price can be very volatile).

What would be an optimal answer for this?

Observations:

- The large transaction is equivalent to $500 \%$ of the exchange's daily volume, so if we sell all the BTC at once, it will have an upward influence on the BTC price.

- If we sell too low, the exchange could lose money if the transaction pumps the BTC price past what they were sold for.

I'm thinking that partitioning the large transaction into smaller ones might be better, but I'm not certain. Any help or insight appreciated!

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.