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What is the Binance Funding Rate Arbitrage Bot and How Does It Work?

What is the Binance Funding Rate Arbitrage Bot and How Does It Work?

2024-04-29 21:19
Last updated: 14 June 2024

1. What is the Binance Funding Rate Arbitrage Bot?

The Binance Funding Rate Arbitrage Bot is an innovative tool designed for traders to engage in arbitrage strategies between perpetual futures contracts and their spot equivalents. It leverages the funding rate mechanism by hedging their futures position with a spot position to collect the funding fee.

2. What are funding fees in Perpetual Futures trading?

Funding fees are periodic payment between long and short position holders in perpetual futures markets, intended to align the futures prices with the spot prices of the underlying asset.
Funding fees = position size x funding rate
Funding rate then determines the funding fee, and fluctuates over time for every symbol independently. You can have an overview of the funding rate here for every symbol on Binance Futures. For more information about the funding fees, refer to the dedicated Blog: What Are Funding Fees in Binance Futures?

3. How does Funding Rate Arbitrage Bot work?

Arbitrage involves going long in one market (e.g., spot) and short in the other (e.g., futures) to collect the funding fee. The funding rate arbitrage strategy is delta neutral, meaning it aims to hedge out price movement risks by taking opposite positions in the futures and spot markets. This strategy implies that no matter the price change direction, your profit on a long position will offset your loss on short (or vice versa), and you will collect the funding fee. The goal is to profit from the funding rate payments without being exposed to significant price volatility risks.
  • Positive Carry
In scenarios where the funding rate is positive, a trader can generate stable funding fee income by purchasing on the spot market and short selling an equivalent position in perpetual contracts – this type of arbitrage is often referred to as positive arbitrage.
  • Reverse Carry
When the funding rate is negative, arbitrageurs can still earn stable funding fee income by going "short" on the spot market, typically by borrowing the asset, selling it at the current price, and simultaneously "longing" an equivalent leveraged position in the perpetual contracts. Basically, they are betting on the market price to rise in the future to benefit from the funding rate.

The Binance Funding Rate Arbitrage Bot streamlines the trading strategy by automating the process for the user. After selecting a trading pair, such as BTCUSDT, the bot analyses the current direction of the funding rate.
  • If the 3-day cumulative Funding Rate is Positive (Long Pay Short): When the funding rate is positive, indicating long positions pay short positions, the bot may short the perpetual futures contract (benefiting from the funding rate) and buy an equivalent amount of the asset on the spot market. This is called 'Positive Carry' on the front end.
  • If the 3-Day cumulative Funding Rate is Negative (Short Pay Long): If the funding rate is negative, suggesting that short positions pay longs, the bot will take a long position in the futures market and sell the equivalent in the spot market. Subsequently, to maintain the original amount of asset on the spot, the bot buys back the asset on spot after collecting the funding fees. This is called 'Reverse Carry' on the front end.
This automated approach ensures that traders can consistently exploit the variations in funding rates to potentially secure profits from these periodic payments.

4. How to use the Funding Rate Arbitrage Bot

Step 1. Head to the Arbitrage Bots interface

From Binance homepage, select [Trade] - [Trading Bots], then select [Arbitrage Bots].
Alternatively, head directly to the 'Arbitrage Bots' section on the Binance Trading Bots interface.

Step 2. Pick a symbol for your arbitrage strategy

Start by picking a symbol for which you’d like to implement an arbitrage strategy.
Understand the rates:
  • 3D Funding%: Sum of the recent funding rate settled over the past 3 days
  • APR: The annual rate generated by extrapolating the funding rate to a year
    APR = |3 Day Cum. Rate%| / 3 * 365 / 2
Understand the Strategy Options:
[Positive Carry]: Employ this strategy when the 3-day cumulative funding rate is positive. This involves shorting futures to accumulate funding fees and buying the equivalent amount on the spot market to hedge against price changes.
Positive Carry: Employ this strategy when the 3-day cumulative funding rate is positive.
[Reverse Carry]: Use this strategy when the 3-day cumulative funding rate is negative. This means going long on futures to collect funding fees and shorting an equivalent amount on the spot market.
Reverse Carry: Use this strategy when the 3-day cumulative funding rate is negative.

Step 3. Input Investment Amount

Once you’ve chosen the symbol, head to the order interface to input the parameters.
You can visualize your amount available on spot and input Investment amount. Ensure sufficient funds by transferring or depositing into your Spot Wallet.
Please note:
  • The investment asset for USDT Futures and CM Futures positive carry arbitrage is USDT.
  • The investment asset for USDC Futures positive carry arbitrage is USDC.
  • The investment asset for reverse carry arbitrage is base asset, e.g. BTC, ETH, BNB, etc.
Buffer Mechanism:
We reserve 10% of the initial investment as a buffer to account for margin checks and market movements. For example:
  • If you invest 1,000 USDT into a long UM strategy, only 900 USDT will go to buy the base asset, with a corresponding 900 USDT notional value in the short UM position.
  • The buffer helps prevent failing the margin check when the market moves sharply during strategy creation.

Step 4. Create Arbitrage Portfolio

After setting your parameters, initiate your strategy. It may take some time for the bot to align the sizes of both legs.

5. Monitoring / Managing your portfolios

Monitoring your strategies

Track your strategy from the [Running] tab where you can view details such as position size, total funding, market value, and receive funding fee alerts.
  • Position Size: Notional Values of Spot and Futures leg
  • Total Funding: Accumulated total of all funding fees collected during the strategy’s runtime
  • Market Value: total balance of all assets allocated to the strategy (using last price) + unrealized PnL from futures positions
  • Funding Fee Alert: Indicates that current 3-Day Cumulative Funding Rate or the Next Funding Rate has opposite buy/sell direction from your running strategy. Consider ending the strategy manually when triggered.

Managing your strategy

  • To end your strategy, select [End] on the user interface, which will close out your positions and stop the trading strategy. Then select [Confirm].
  • Filter Options: Utilize filters to display strategies based on Positive Carry or Reverse Carry.
  • History Review: Access the [History] tab to review past strategies and their outcomes.

Monitoring your Trading Bots assets

Access your Arbitrage bots assets and strategies via the 'Wallet' section: Select [Wallet] icon - [Trading Bots] from the Binance Futures homepage.
If not already done, you will first need to activate your Trading Bots wallet.
To view your running arbitrage strategies, select [Arbitrage Bot] - [Running].
To view assets allocated to running arbitrage strategies, select [Arbitrage Bot] - [Assets].
To view further details of arbitrage records, select [View Bot].

Frequently Asked Questions: Futures Funding Rate Arbitrage Bot

You can operate up to 10 independent funding rate arbitrage strategies, each supporting a different symbol. This means you cannot have more than one strategy per symbol, even in different accounts. For example, if you open a BTCUSDT long in one account, you cannot open another BTCUSDT strategy in a different account.
Currently, borrowing on Margin is not supported for these arbitrage strategies.
Leverage affects the initial margin required but does not influence the margin ratio. Therefore, increasing leverage does not inherently increase liquidation risk.
Your futures position size is equal to your spot order executed size in order to keep a delta neutral strategy.
The leverage level will impact the initial margin required to keep the position open.
Significant and persistent price differences may affect the profitability and risk profile of your arbitrage strategy. Spread control makes sure that Futures price and Spot price are aligned when you create the strategy.
Spread = futures last price - spot last price, for long is -0.1%, for short is 0.1%
Spread control is by default in the system set at 0.1% absolute value.
You can access real-time funding rate as well as Funding Rate History data for all USDs-M perpetual futures contracts through the Binance Futures interface by clicking [Data] - [Futures Data] - [Funding Rate History] / [Real-Time Funding Rate]
Minimum Notional:
  • For USDⓈ-M contracts:
The minimum notional value is the greater of either the minimum notional specified for futures or the spot minimum order size, multiplied by a default multiplier of 1.5.
  • For COIN-M contracts:
The minimum notional is the maximum of the spot minimum order size or the product of the minimum trade amount and the contract multiplier, then multiplied by a default multiplier of 1.5.
For reference, the minimum notional value for futures can be found on the Binance Trading Rules page, and the minimum order size for spot is available on the Trading Rules page.
Maximum Notional:
  • The maximum notional size is set by the first-tier cap for each asset, multiplied by n (with n defaulting to 0.1).
  • The first-tier cap for each asset is listed in the "Cross Margin Collateral Ratio" section here.
For example, for BTC, the first-tier cap is 40,000,000 USDT, which results in a maximum investment amount of 4,000,000 USDT for long positions or the BTC equivalent for short positions.
The bot incorporates several risk management features, including leverage settings, buffer rates for position sizing, and compliance checks. Additionally, PM accounts undergo checks for margin and collateral rates to ensure positions remain sustainable under volatile market conditions.
While the bot aims to minimize risk through its hedging strategy, extreme market conditions and delays in price adjustments between spot and futures markets could potentially lead to liquidation events. Users should maintain adequate margins and monitor their positions closely to manage risk effectively.
While the bot aims to reduce risk through hedging, extreme market conditions could still lead to potential liquidation.
  • Spot vs Futures Mark price divergence scenario
For example, an extreme market divergence can cause a significant spread between the futures and spot prices. Suppose you go long in a UM BTCUSDT contract at 60,000, while the spot price remains unchanged, but the UM BTCUSDT price drops to 12,000. In this case, the account could be liquidated, as the uniMMR would drop below 105%.
  • Recurring Opposite Funding Rate eating up margin
Additionally, if the funding rate changes against your position, it can gradually eat up your margin, eventually leading to liquidation.
  • Unified Maintenance Margin Ratio
The system calculates a Unified Maintenance Margin Ratio (uniMMR) to assess portfolio risk, balancing equity against the total maintenance margin requirements across all positions. Liquidation will occur when uniMMR goes below 105%.
  • Collateral Rate
The collateral rate for USDT and USDC is 1.0, while all other assets have a collateral rate of 0.95.
  • uniMMR Calculation
UniMMR = Unified Account Equity / Unified Maintenance Margin Amount
Where:
  • Equity: Total equity in the arbitrage bot account (tied to the considered strategy)
  • Maintenance Margin: The sum of maintenance margins for both spot and futures positions.
For detailed uniMMR calculation, please refer to the dedicated article What Is the Unified Account Maintenance Margin Ratio (uniMMR) and How Is It Calculated?
A trading symbol will be available for arbitrage when it is supported in both margin trading and futures trading. If a symbol is delisted from either margin or futures trading, the Binance Funding Rate Arbitrage Bot will automatically close all arbitrage strategies associated with that symbol and conduct an automatic settlement.
To learn more about Binance Trading Bots, visit the Trading Bots FAQs page.