Understanding Nested Day and Hour Bands in Crypto Market Making

Introduction

Crypto markets are dynamic, with liquidity, volatility, and trading activity fluctuating throughout the day. For market makers, adapting to these changes is essential to provide consistent liquidity and maintain risk control. One powerful tool for this is the use of nested day and hour spread bands within market making bots. This article explores how these bands work, why they matter, and how they can be configured in Atlas LP to optimize liquidity provision.

What Are Spread Bands?

Spread bands define the minimum and maximum distance (in basis points, or bps) between a market maker's bid and ask quotes and the market price. By setting a spread band, market makers control how tightly or loosely their orders are placed around a base price. A narrower spread can attract more trades but may increase risk, while a wider spread can reduce risk but may result in fewer trades.

The Need for Time-Based Spread Adjustments

Market conditions are rarely static. Trading volume, volatility, and liquidity can vary significantly by time of day, day of the week, or even in response to scheduled events. For example:

• Liquidity may be thinner overnight or during weekends.
• Volatility may spike during major news releases or market openings.
• Certain hours may see more aggressive trading or larger order flow.

A single, fixed spread band may not be optimal for all these conditions. This is where nested day and hour bands come into play.

What Are Nested Day and Hour Bands?

Nested day and hour bands allow market makers to set different spread bands for specific days and hours. This means you can define a base spread for the overall strategy, then override it with customized spreads for particular days of the week, and further refine it for specific hours within those days.

How Nesting Works

• Base Band: The default min/max spread applied at all times unless overridden.
• Day Band: Overrides the base band for a specific day (e.g., Mondays have a different spread than Fridays).
• Hour Band: Overrides both the base and day bands for a specific hour within a day (e.g., 14:00–15:00 UTC on Wednesdays).

This hierarchy ensures that the most specific setting (hour band) takes precedence, followed by day bands, and then the base band.

Configuring Nested Bands in Atlas LP

Atlas LP allows users to configure nested day and hour spread bands as part of its Basic strategy. Here’s how the process works:

1. Set the Base Spread:
   • Define the minimum and maximum spread (in bps) that will apply by default.
   • The minimum width must be at least 40 bps.
2. Add Day Bands:
   • For any day of the week, specify a different min/max spread.
   • Example: Set a wider spread on Sundays due to lower liquidity.
3. Add Hour Bands:
   • For any hour of any day, specify a further override.
   • Example: Set a tighter spread from 12:00–14:00 UTC on Mondays to capture higher activity.
4. Validation:
   • Atlas LP validates all settings before a bot can start, ensuring that each band meets the required width and basis point constraints.

Example Configuration

Suppose you want your bot to:

• Use a 50–80 bps spread most of the time.
• Use a 70–120 bps spread on weekends.
• Use a 40–60 bps spread during weekday afternoons (13:00–16:00 UTC).

You would set the base band to 50–80 bps, add day bands for Saturday and Sunday at 70–120 bps, and hour bands for Monday–Friday 13:00–16:00 UTC at 40–60 bps. The bot will automatically apply the most specific band for each tick.

Why Use Nested Bands?

1. Adapt to Liquidity Changes

Crypto markets can be highly fragmented and liquidity can shift rapidly. By using nested bands, you can widen your spreads during thin periods to reduce risk, and tighten them during high-activity periods to increase participation.

2. Manage Risk Dynamically

Wider spreads during volatile or illiquid times help protect against adverse selection and sudden price swings. Conversely, tighter spreads during stable periods can help you capture more trades.

3. Optimize for Project or Exchange Needs

Token projects or exchanges may want to ensure tighter spreads during promotional events or scheduled listings. Nested bands allow for precise, time-based control without manual intervention.

How Atlas LP Applies Bands in Practice

Each tick (the bot’s operating interval, default 3 seconds), Atlas LP reads the latest market data and determines which spread band applies based on the current day and hour. The bot then:

• Computes the desired order ladder using the active band’s min/max spread.
• Places new limit orders at the correct levels.
• Cancels or adjusts orders that no longer fit the active spread band.

If the market is empty, the bot seeds one buy and one sell order around the base price, ensuring continuous presence.

Best Practices for Using Nested Bands

• Monitor Market Patterns: Review historical liquidity and volatility to identify when adjustments are needed.
• Start Simple: Begin with just a few bands, then add more granularity as you observe results.
• Avoid Overfitting: Too many frequent changes can create unnecessary complexity.
• Review Performance: Use Atlas LP’s console to track fills, fees, and asset value snapshots for each period.

Limitations and Considerations

• Atlas LP supports only spot market making on selected centralized exchanges. Margin and futures are not supported.
• The bot places only limit orders; it never uses market orders.
• All API keys are encrypted and never require withdrawal permissions.
• Only the Basic strategy with spread bands is available; other strategies are shown as 'soon' and cannot be started.
• Wash trading, self-trading, and volume manipulation are strictly prohibited. Genuine market making means placing resting limit orders that any participant can trade against.

Conclusion

Nested day and hour bands are a powerful feature for market makers seeking to adapt to the ever-changing conditions of crypto markets. By configuring these bands in Atlas LP, you can fine-tune your liquidity provision, manage risk dynamically, and respond to market cycles with precision.

To learn more about market making strategies and how Atlas LP can support your liquidity goals, visit our market making overview or explore our liquidity bot features.

Atlas LP does not guarantee returns, prices, volume, or listings.