Chinese Bitcoin Trading Volumes Crash 90% Overnight

As we reported yesterday, there was one reason why bitcoin quickly became the darling of HFT and various high speed algo traders operating out of China - which is home to about 10 significant bitcoin venues, with a majority of trades executed on the top three, and which recently accounted for as much as 98% of global bitcoin trading: domestic transactions were "frictionless", as there were no fees on buys or sells. However, that changed on Sunday night because as China's three largest bitcoin exchanges, BTCC, Huobi and OkCoin, all said in separate statements on their websites, starting Tuesday they will charge traders a flat fee of 0.2% per transaction. The move was meant to "further curb market manipulation and extreme volatility."

As expected, the impact was immediate and on the day the new fees went into effect, trading volumes crashed by roughly 90% across most Chinese exchanges.

According to Bloomberg, the same high-speed traders who had dominated bitcoin trading in China for the past year, are pulling out of China’s bitcoin market after the three biggest venues started charging transaction fees on Tuesday. One-hour volume at OkCoin fell 89% to 1,026 bitcoins at 1 p.m. local time, from 10,062 during the same period on Monday, according to the venue’s website. Huobi and BTC China saw declines of 92% and 82% respectively.

According to data from Bitcoinity there were roughly 4,800 trades on OKCoin between the hours of 11pm and midnight EST. In the following hour, the exchange registered just over 1,000 trades, denominated in CNY: a comparable fall of more than 80%.

Data pulled from Bitcoinity for BTCChina also demonstrates the apparent effect the new trading fees have had on volume. After registering more than 37,000 trades between the hours of 7 and 8pm EST, that amount had fallen to less than 1,000 between the hours of midnight and 1am EST

As discussed previously, and as Bloomberg noted, the lack of fees was seen as the main reason why as much as 80 percent of bitcoin trading in China was automated, with professionals using strategies such as "cross-exchange arbitrage" also known as frontrunning of major order blocks. The platforms made money by charging clients to withdraw bitcoin, but Tuesday’s changes may have ended that system for good. The moves came after the Chinese central bank made on-site inspections of the exchanges and reportedly found a number of violations.

“The exchanges are cutting their arms off to stay alive,” said Zhou Shuoji, whose Fintech Blockchain Group runs a bitcoin hedge fund and venture capital fund. The venues are proactively weeding out speculative trading to appease regulators, said Zhou. The fees, introduced by all three venues at midday on Tuesday, made market-making unprofitable, he said.

And while HFT traders, frontrunners and other "liquidity providing market makers" are furious that their business model in China was just crushed, the good news is that much of the inherent volatility in bitcoin may now be gone.

The good news is that bitcoin prices today were little changed, at around 6,300 yuan per bitcoin. Ultimately, any stability in bitcoin prices as a result of the elimination of HFT-driven volatility may be just what the digital currency needs to rise above $1000 and stay there.