Order Flow Impact and Price Formation in Centralized Crypto Exchanges
Study on bitcoin price formation on Coinbase and Binance, highlighting differences between crypto and traditional asset markets, with implications for price discovery and market regulation.
Paper Metadata
Publication Date: 2024-07-19
Source: SSRN
Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4867599
Carol Alexander, University of Sussex Business School; Exponential Science Foundation
Daniel F. Heck, University of Sussex Business School
Andreas Kaeck, University of Sussex
Ryan Riordan, Queen's University - Smith School of Business; Ludwig-Maximilians-University Munich, Faculty of Business Administration (Munich School of Management)
Keywords
Cryptocurrency
Order Flow Impact
Price leadership
Limit orders
Market integration
Notes for Review
Recommendation: 92%
This paper presents a comprehensive analysis of the impact of different order types on bitcoin price formation within and between Coinbase and Binance, two of the largest centralized crypto asset exchanges. The authors find that limit order submissions and cancellations are considerably more frequent than market orders and have a larger total contribution to price discovery. The results highlight the differences between crypto and traditional asset markets, including the absence of order and trade interaction rules across crypto exchanges, the lack of external oversight, and the fragmentation in the market. The study uses granular data from Coinbase and Binance, including order book and transaction data, to investigate the price formation process. The authors' findings have implications for market regulation, as recent regulatory actions reflect a broader push to increase oversight in the crypto market to protect investors. The paper's contributions to the field of market microstructure and high-frequency trading make it a valuable read for researchers and practitioners interested in the crypto market. Overall, I highly recommend this paper to anyone interested in understanding the intricacies of the crypto market and its potential implications for traditional finance.
The study uses a comprehensive dataset of tick-by-tick order book and transaction data for Bitcoin (BTC) from Coinbase and Binance, spanning from November 1, 2022, to March 31, 2023. This data, obtained from Tardis.dev, captures all transactions and order book messages for BTC-USD on Coinbase and BTC-USDT on Binance, including details on price, quantity, order sign, and timestamps. Orders are categorized into eight distinct actions based on their impact on price: price-changing, price-reinforcing, and price-neutral actions.
A notable discovery is that limit orders dominate the market, with submissions and cancellations occurring far more frequently than market orders, playing a significant role in price discovery, consistent with traditional equity markets. Furthermore, the study reveals an asymmetric price impact, where actions on Binance, particularly limit orders, have a substantial impact on prices on both Binance and Coinbase, while actions on Coinbase have a limited impact on Binance. This suggests that Binance consistently leads Coinbase in price discovery, particularly at lower frequencies, indicating its dominance in incorporating new information into prices. The lack of integration between Coinbase and Binance at high frequencies is attributed to the absence of order protection rules and best execution obligations in crypto markets, highlighting differences from traditional financial markets.
Abstract
We study the impact of different order types on bitcoin price formation within and between Coinbase and Binance, two of the largest centralized crypto asset exchanges. We find that limit order submissions and cancellations are considerably more frequent than market orders and have a larger total contribution to price discovery. While prices are generally integrated across markets, this integration breaks down at high frequencies, allowing for price discrepancies to persist. We also highlight the differences between crypto and traditional asset markets, including the absence of order and trade interaction rules across crypto exchanges, the lack of external oversight, and the fragmentation in the market. Recent regulatory actions reflect a broader push to increase oversight in the crypto market to protect investors.