Incentives

Weekly Allocation Incentives for Futures Users (WAIFU)

Value Routing Efficiency (VRE)

First Principles Decomposition

Break down the idea of a "network effect" into:

• Value per new user (V)
• Retention multiplier (R)
• Contribution effort (E)

Model:

Net Network Value = V × R / E

Increase V and R, while reducing E.

Framework for Establishing a Baseline for a Trader Incentives Program

1. Executive Summary

This framework provides a quantitative methodology for establishing a baseline for our incentives program. By modeling the total cost impact on representative trading strategies, we can engineer a fee and rebate structure that makes our market attractive from a quantitative trader's perspective.

We are not uncertain

2. The Centrality of Cost in a Trader's Decision-Making

For sophisticated market participants, trading costs are paramount. Unlike market returns, which are unpredictable, costs are a known and controllable variable. A trader's primary challenge is to ensure that their expected returns (alpha) are not eroded by the costs of execution.

Therefore, our exchange's cost profile—comprising both direct commissions and indirect market impact—will be a primary determinant in whether these participants deploy their strategies on our platform. They will not simply trade and accept the costs; they will design their trading systems around our cost structure. An uncompetitive cost profile will lead them to either trade less frequently or avoid our market entirely.

3. A Quantitative Model for Total Participant Cost

To design an effective incentives program, we must first quantify the total cost a participant will incur. This cost has two main components:

• Commissions (C_commission): The direct fees charged by the exchange and clearing house per transaction. This is the primary lever controlled by our fee schedule and rebate programs.
• Slippage (C_slippage): The cost incurred from market impact, typically measured by the bid-ask spread. For a small-to-medium-sized participant, this is often estimated as half the spread for each side of a trade. This is an indirect lever, influenced by the liquidity we attract, particularly through market maker incentives.

The total round-trip cost for a single unit (e.g., one contract) can be modeled as:

C_roundtrip = C_commission + C_slippage

Where Slippage is fundamentally a function of the bid-ask spread:

C_slippage ≈ ½ × Bid-Ask Spread (for entry) + ½ × Bid-Ask Spread (for exit)

4. The Standardized Cost Benchmark: Volatility-Adjusted Annual Cost (VAAC)

To make meaningful comparisons between our proposed market and established, liquid markets (e.g., S&P 500 or Eurodollar futures), we must standardize costs. Raw dollar costs are insufficient, as they don't account for a market's inherent volatility or a strategy's trading frequency.

The industry-standard method is to annualize total costs and normalize them by the market's volatility. We will refer to this metric as the Volatility-Adjusted Annual Cost (VAAC), expressed in basis points (bps).

The calculation follows two steps:

1. Calculate Total Annualized Cost: This depends on the C_roundtrip and the strategy's Turnover (T_v)—the number of times a position is traded per year.

   Total Annualized Cost = C_roundtrip × Average Position Size × T_v

2. Normalize by Volatility: Divide the annualized cost by the market's annualized volatility (σ_annual) to get the standardized cost.

   VAAC (in bps) = (Total Annualized Cost / σ_annual) × 10,000

This VAAC metric allows us to benchmark our market's "expensiveness" on an apples-to-apples basis against any other market, from the perspective of a quantitative trader.

5. Application: Designing the Incentives Program Baseline

This framework outlines our methodology for setting fee, rebate, and market maker incentive structures.

Step 1: Establish a Competitive VAAC Threshold

Our goal is to ensure our market's cost structure allows typical strategies to operate comfortably below this limit: tbe Target VAAC Threshold.

Step 2: Model Scenarios for Target Trader Profiles We must model the VAAC for different types of traders to model a represnative cost basis.

Profile names are non-normative, i.e. placeholder terms.

For each profile, we will calculate the resulting VAAC based on our proposed cost structure.

Step 3: Tune Incentives Using VAAC as the Guide The modeling will reveal whether our proposed structure is competitive.

• If Calculated VAAC > Target Threshold (13 bps): Our market is too expensive. We have two levers to pull:

  1. Reduce C_commission: Introduce volume-based commission tiers or targeted rebates for specific participant groups to lower the direct cost.
  2. Reduce C_slippage: Enhance market maker incentives to encourage tighter bid-ask spreads, thereby lowering the indirect cost for all participants.

• If Calculated VAAC < Target Threshold (30 bps): Our market is competitively priced. This signals a strong value proposition. For "very cheap" profiles (e.g., VAAC < 50 bps), it indicates that our market can support even higher-frequency strategies.