Overview

Designed and built an end-to-end delta-neutral statistical arbitrage strategy between Binance (centralized exchange) and dYdX (DeFi decentralized exchange), targeting cross-venue microstructure inefficiencies.

Period: Sep 2023 – Jan 2024
Organization: La Valériane - Investment Branch
Role: Quantitative Developer

Motivation

The crypto derivatives market exhibits significant pricing inefficiencies between centralized and decentralized exchanges due to:

Different market microstructure mechanisms
Latency asymmetries
Varying liquidity distributions
Information flow differences

This project exploited these inefficiencies through a systematic, delta-neutral arbitrage strategy.

Key Components

Data Infrastructure

Reconstructed full L2 order books from both exchanges
Built 2-year tick-level datasets for comprehensive analysis
Analyzed cross-exchange price formation patterns
Studied latency asymmetries and liquidity distribution

Signal Development

Developed arbitrage signals based on:
- Microprice deviations between venues
- Depth-adjusted fair value estimators
- Order flow imbalances
Incorporated slippage modeling for realistic execution assumptions
Designed execution constraints to manage risk

Execution System

Implemented automated trading bot with dual-exchange connectivity
Built under realistic latency assumptions
Handled partial fills and order management
Maintained strict delta neutrality throughout operations

Backtesting & Validation

Comprehensive backtesting on 2 years of historical data
Optimized execution logic, spreads, and slippage controls
Validated strategy robustness across different market conditions
Risk management and position sizing optimization

Technical Stack

Programming: Python, Ruby
Data Processing: NumPy, Pandas
APIs: Binance API, dYdX API
Infrastructure: Automated execution bot, order management system
Analysis: Statistical modeling, backtesting framework

Results

Annualized Returns: ~8%
Daily Trading Volume: $800,000 – $1,000,000
Market Neutrality: Strict delta-neutral positioning maintained
Strategy Duration: Sep 2023 – Jan 2024

The strategy successfully exploited cross-venue inefficiencies while maintaining market neutrality, demonstrating the viability of systematic arbitrage in crypto derivatives markets.

Key Insights

Microstructure Differences: CEX and DEX have fundamentally different market structures that create exploitable inefficiencies
Execution Matters: Realistic modeling of slippage and latency is critical for accurate strategy evaluation
Risk Management: Delta-neutral positioning and strict risk controls are essential for stable returns
Market Dynamics: Cross-venue arbitrage opportunities are time-varying and require adaptive strategies

Challenges Overcome

Data Quality: Reconstructing reliable order book data from multiple sources
Latency Management: Handling asymmetric latencies between CEX and DEX
Execution Complexity: Managing simultaneous orders across different exchange infrastructures
Risk Control: Maintaining delta neutrality in dynamic market conditions