Greg Zanotti (MS&E): Cryptocurrency Market Microstructure: Human and Machine under the Microscope
Greg Zanotti: Cryptocurrency Market Microstructure: Human and Machine under the Microscope
Abstract: In ongoing projects, Greg Zanotti and Markus Pelger are working on understanding the microstructure of cryptocurrency trading. Presently, we can reconstruct the complete order books of major cryptocurrencies for over one year at one of the leading global cryptocurrency exchanges. This unique data set not only includes all submitted orders and their cancellations, but also information about whether an order was submitted by an algorithmic trader or a human trader. Hence, we have the complete high-frequency trading behavior of sophisticated algorithmic traders and (potentially unsophisticated) human traders in a largely unregulated market. First, we show how sophisticated algorithmic traders seem to systematically profit from unsophisticated human traders in contexts where liquidity rapidly enters or exits the limit order book. Second, we show that the actual liquidity is lower than it seems, as algorithmic orders are more frequently canceled during periods of higher volatility. Our unique data allows us to study many relevant follow-up questions, which include comparisons to traditional markets, the identification of algorithmic traders' strategies, the design of crypto exchanges that can protect retail traders, and the formation of policy advice for regulation.