If you have already checked the patch notes for the May 7th system upgrade, you may have noticed this phrase in the list and be wondering what it means. It is not a new order type, however, it is an updated way of how market orders interact with our trading bandwidth limits.

The trading bandwidths

For those unfamiliar, Deribit operates with trading bandwidth in place. It means that there is an upper and lower price limit at which trades can be executed on any given instrument. For example, on the Bitcoin Perpetual contract, the bandwidth is currently set at mark price +/- 1.5%. Therefore, if the perpetual is trading at $5,000, the price limits will be $4,925 and $5,075.

Bandwidth limits prevent huge price deviations from the current price of the underlying asset (as defined by the mark price).

There are a few reasons why large divergences can happen:

  • A large trader trying to push the price around (a stop hunt for example)
  • An accidental fat finger
  • A cascade of liquidations and/or stop losses

These are usually just deviations from the ’real’ price. If there is a genuine move in price across all exchanges, the index will move, bringing the mark price and the bandwidth limits along with it. In this way, the bandwidth is designed to only stop unnatural spikes in price.

Market orders and trading bandwidths

Market orders will attempt to fill the order at the best price possible, moving deeper and deeper into the order book until it is completely filled, not considering the price it eventually reaches.  However, what happens when a market order that is attempting to fill ‘at any price’ runs into the price limit that stops orders executing outside the bandwidth?

Previously on Deribit, the market order would continue to fill right up to the bandwidth limit as normal, however, after that, any remaining quantity yet to be filled would be canceled. While this is normal behavior with a bandwidth system, it is not what most traders expect to happen with a stop loss.

New functionality

As of this latest update any remaining quantity will no longer be canceled, instead, a limit order for the remaining quantity will be placed into the order book at the bandwidth limit price, waiting to be filled.

In this way, it still obeys the bandwidth rules, however, is also more in line with what traders expect from their stop loss order.

The system as a whole is still protected from big price spikes and traders’ stops are safer as they will no longer have portions canceled for hitting the bandwidth limit. Win, win!

This change was partially the result of feedback from Deribit users and we actively encourage you to join our telegram channel here: https://t.me/deribit