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Order flow analysis of cryptocurrency markets

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Abstract

Order flow analysis studies the impact of individual order book events on resulting price change. Using data acquired from BitMex, the largest cryptocurrency exchange by traded volume, the study conducts an in-depth analysis on the trade and quote data of the XBTUSD perpetual contract. The study demonstrates that the trade flow imbalance is better at explaining contemporaneous price changes than the aggregate order flow imbalance. Overall, the contemporaneous price change exhibits a strong linear relationship with the order flow imbalance over large enough time intervals. Lack of depth and low update arrival rates in cryptocurrency markets are found to be the main differentiators between the nascent asset class market microstructure and that of the established markets.

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Authors and Affiliations

  1. Thalesians Ltd., London, UK

    Eduard Silantyev

  2. BNP Paribas, Paris, France

    Eduard Silantyev

  3. London Institute of Banking and Finance, London, UK

    Eduard Silantyev

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  1. Eduard Silantyev
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Correspondence to Eduard Silantyev.

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Appendices

Appendix A: Exchange specification

An essential feature of BitMex is that, above all, it is a marketplace for derivatives on cryptocurrency, as opposed to a spot market. All margin payments are carried out in Bitcoin, thus the only predicate for participating in the markets is a Bitcoin deposit. Another key feature of BitMex is leverage that it offers to traders. Currently, maximum leverage that one can take out on XBTUSD contract is \(\times \) 100.

XBTUSD is effectively a perpetual swap contract, where one contract is worth 1 USD of Bitcoin. XBTUSD never expires, but participants are may be subject to margin funding. The contract tracks the underlying price of Bitcoin, which is calculated as an index across various spot markets. The tracking mechanism is dependent upon funding ratio. In essence, to reduce tracking error, BitMex will calculate the deviation between current XBTUSD contract value and spot price index. If the value of the contract is above the reference index, than the implied interest rate of Bitcoin is higher that USD. Hence, to stabilise the price, the long contract holders will pay funding the short-sellers of the contract. This mechanism applies vice versa when contract value falls below the reference index and is what keeps the contract at fair price.

Trading fee structure on BitMex is very straightforward and highly shifted towards market makers when compared to other exchanges. Market makers get paid a constant 25 bps rebate, while takers pay 35 bps in commission.

Appendix B: Python code

figure a
figure b

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Silantyev, E. Order flow analysis of cryptocurrency markets. Digit Finance 1, 191–218 (2019). https://doi.org/10.1007/s42521-019-00007-w

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