A recently published research paper, Order flow analysis of cryptocurrency markets, caught our attention. The paper’s author, Eduard Silantyev, examined trade and quote data of the XBT/USD perpetual derivatives contract on BitMEX, the largest cryptocurrency exchange by traded volume during the research period.
Silantyev is a digital data engineer at BNP Paribas (he is speaking on his own research efforts and not on behalf of the bank) and a quantitative developer for electronic trading at the Thalesians, a think tank.
The main finding of his study is that trade flow imbalance explains the contract’s price change better than order flow imbalance, which is basically pointing out that there is a big market impact with trades, said Silantyev, speaking to Fintech Capital Markets. In other words, liquidity is bad on the markets.
While this might not be particularly surprising, what it says about the emerging market structure is worth scrutinizing. One of Silantyev’s conclusions is that the cryptocurrency market shares many features with conventional markets, specifically on microstructure levels. The main differences, he noted in the report, are attributed to lower average depths of the order book, which spawn other discrepancies related to how order books absorb order flow.
Meanwhile, for FX traders that have been around long enough to see the dawn of electronic trading some 20 years ago, the ways crypto markets are evolving sounds familiar.
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