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Each histogram has bars. We have identified some peculiarities that are worth mentioning:.
Definition of Liquidity:
There might be some explanations for these observations. Second, if the timestamp is stamped at the level of a gateway, a gateway may have a specific algorithm to batch messages trades before sending them via WS Binance? Third, market participants may use algorithmic orders such as TWAP, which generate trades with regular intervals.
Nevertheless, without further feedback and disclosure from the exchanges, these outliers look suspicious and hardly justifiable. As seen on the chart, the price jump corresponds to the widening of a bid-ask spread on all selected exchanges, which is expected.
The strange thing here is the widened spreads on Bitfinex from to UTC, although the price fluctuations were low and the volume was low, too. The same lull was observed on other exchanges have a look at Coinbase Pro chart below. One of the explanations may be technical issues of a single market maker that has to quote narrow spread while other makers have no such obligations. To the best of our knowledge, Bitfinex has no official market making program, which makes us think it might be a case of an affiliated market maker.
The 10 BTC volume weighted bid-ask chart shows that Bitfinex has been impacted by the price movement to a greater extent than other exchanges.
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It may imply that Bitfinex was the initiating exchange. In contrast, Binance had experienced a very moderate widening of spreads; thus, it may indicate that Binance was a lagging exchange in this case and that arbitrage may be hampered. Further analysis of the 10 BTC volume weighted bid-ask spread has shown that the purchase was divided into 3 bunches, which are recognizable as three peaks on the chart below. The chart of handy liquidity leads to two main inferences: 1 we observe the decline in handy liquidity during the pump on all four exchanges, 2 Coinbase and Bitstamp have experienced the most significant drop in comparison to other exchanges.
On the one hand, it may mean that the price movement was initiated there producing the highest pressure on order book liquidity. On the other hand, regardless of a source of the price shock, liquidity has vanished from Coinbase and Bitstamp despite the presence of market makers during a turmoil, when the market depth is most valuable.
However, on a time frame of minutes hundreds of milliseconds, which are explained by geography, have little impact. In addition, it is worth mentioning that, initially, the price on Bitstamp — and afterwards the price on Binance — rose remarkably slower than on other exchanges. Similar dynamics were observed during the second impulse — and the third one — The analysis of trades, which happened during this period, has confirmed that large purchases were initiated on Bitfinex straight vertical lines.
However, one can see smaller shifts on Binance. Can it be explained by deeper liquidity?
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The chart of the order book disequilibrium shows strong buyers pressure during the first price shock with all exchanges having negative disequilibrium but Bittrex. The upward pressure began at and lasted till However, we observe both buyers and sellers during this period. Bitstamp had the most volatile disequilibrium when buyers and sellers were trying hard to reach a price balance. The metrics that have been used in this study are applied to the public datasets consisting of anonymous trades and order books.
The data collector subscribes to the data feed of an exchange and saves a certain number of levels of an order book. All data is received via WebSocket technology. Within the scope of the research, we have analysed L2 data, i. All selected exchanges have more advanced technology than most of their peers in crypto space. From Binance we receive data once per second, although it has a timestamp with 1 ms precision. The high quality of the data makes it easier to detect market manipulations, thus, it can be assumed that an exchange, which takes care of its data, seeks more transparency.
In order to identify and localize the source of an originating price movement, one needs to have precisely synchronised timestamps in both order books and trades across all analysed exchanges. Unfortunately, the current level of technology applied by crypto exchanges is well below the standards of the financial industry e. Modern market makers are typically high-frequency trading firms and quantitative hedge funds that integrate deeply into an exchange's technical architecture to gain incremental speed advantages over their competitors.
For market makers, integrating into new trading venues requires a substantial investment in technical integration: data collection, trade execution, and order management. In addition, since market makers stand ready to buy and sell assets at all times, they need to maintain a substantial inventory of assets at an exchange in order to perform this function. Not only do large-cap stocks offer greater profits for market makers due to higher trading volume, but they also carry lower inventory risk because hedging and liquidating in size are easier. For a top market making firm, focusing on the largest and most liquid stocks at the expense of smaller stocks is a natural choice.
A lot of the spread compression and increased competition that we have seen has been in the very large liquid stocks where you have seen a lot of algorithmic type trading, high-frequency type trading, which tends to narrow the spread and make it very cheap and efficient and fast for the large-cap stocks to trade. The fragmented crypto exchange landscape and lack of market standards like FIX protocol has created an even more extreme version of the small-cap liquidity crisis experienced in equities.
For Bitcoin and the other top coins, where over-the-counter OTC trading desks and algorithmic market makers exclusively focus, there is a lush oasis of liquidity where you can trade millions of dollars without moving the market. For the long tail of coins, as well as newly launched exchanges, their markets are barren, desolate wastelands unless they pay hefty sums to professional market making firms to provide liquidity.
Similarly, professional market makers charge exchanges thousands of dollars per month to make a market on a single trading pair. Fragmentation of liquidity across exchanges also increases risk of a flash crash , which occurs when a large market sell order clears out all the top buy offers in the order book and significantly moves the price downward. On exchanges which allow for margin trading, these price resets may trigger margin calls that force further selling, creating a cascading effect that pushes price toward zero.
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The Coinbase Pro flash crash led the exchange to refund millions in losses for affected traders, terminate their margin trading program, and implement additional circuit breakers. Just as in equities, the crypto liquidity crisis stems from a dearth of market makers. Professional market making firms seek markets where they can earn the highest profits while incurring the least inventory risk. While tools like the 0x Launch Kit and white label exchange solutions from AlphaPoint and Modulus have made it much easier to start a new exchange, being a good market maker involves meeting steep technical requirements that make it inaccessible to most individuals and small firms.
To avoid losing money in the dynamic, unpredictable crypto markets, market makers need to collect and handle streaming real-time order book data, build sophisticated machine learning-based models, and engineer high-speed, automated trade execution engines.
HOWARD MARKS: Liquidity is not how easily you can sell something
Since professional market making firms who have already built this stack enjoy lucrative, oligopoly-like profits from providing a rare and valuable service, they have little incentive to share their technology with the general public. What brought me and many others into the blockchain industry was its potential to build a more open and inclusive financial system, a future where anyone in the world can take out a loan, access global investment opportunities, and create new markets for anything even digital cats.
For this future to happen, we need more market makers in the system.
Just as there exists a diverse landscape of crypto exchanges both large and small, there should be a diverse population of market makers with the proper incentive structure and tooling to support these markets. The long tail of markets is a poor fit for large, professional market making firms. In contrast, individuals and smaller global firms have structural advantages in serving the long tail of markets. Most of us HODL our coins without earning interest or other income, so any ability to generate incremental returns from making more productive use of those assets is attractive.