Trade informativeness and liquidity in Bitcoin markets

Liquid markets are driven by information asymmetries and the injection of new information in trades into market prices. Where market matching uses an electronic limit order book (LOB), limit orders traders may make suboptimal price and trade decisions based on new but incomplete information arriving with market orders. This paper measures the information asymmetries in Bitcoin trading limit order books on the Kraken platform, and compares these to prior studies on equities LOB markets. In limit order book markets, traders have the option of waiting to supply liquidity through limit orders, or immediately demanding liquidity through market orders or aggressively priced limit orders. In my multivariate analysis, I control for volatility, trading volume, trading intensity and order imbalance to isolate the effect of trade informativeness on book liquidity. The current research offers the first empirical study of Glosten (1994) to yield a positive, and credibly large transaction cost parameter. Trade and LOB datasets in this study were several orders of magnitude larger than any of the prior studies. Given the poor small sample properties of GMM, it is likely that this substantial increase in size of datasets is essential for validating the model. The research strongly supports Glosten’s seminal theoretical model of limit order book markets, showing that these are valid models of Bitcoin markets. This research empirically tested and confirmed trade informativeness as a prime driver of market liquidity in the Bitcoin market.

Liquidity and Information in Limit Order Markets

How does informed trading affect liquidity in limit order markets, where traders can choose between market orders (demanding liquidity) and limit orders (providing liquidity)? In a dynamic model, informed trading overall helps liquidity: A higher share of informed traders i) improves liquidity as proxied by the bid–ask spread and market resiliency, and ii) has no effect on the price impact of orders. The model generates other testable implications, and suggests new measures of informed trading.

TRADING STRATEGIES WITHIN THE EDGES OF NO-ARBITRAGE

We develop a trading strategy that employs limit and market orders in a multiasset economy where the assets are not only correlated, but can also be structurally dependent. To model the structural dependence, the mid-price processes follow a multivariate reflected Brownian motion on the closure of a no-arbitrage region which is dictated by the bid–ask spreads of the assets. We provide a mathematical framework for such an economy and solve for the value function and optimal control for an investor who takes positions in these assets. The optimal strategy exhibits two dominant features which depend on how far the vector of mid-prices is from the no-arbitrage bounds. When mid-prices are sufficiently far from the no-arbitrage edges, the strategy behaves as that of a market maker who posts buy and sell limit orders. And when the mid-price vector is close to the edge of the no-arbitrage region, the strategy executes a combination of market orders and limit orders to profit from statistical arbitrages. We discuss a numerical scheme to solve for the value function and optimal control, and perform a simulation study to discuss the main characteristics of the optimal strategy.

The unmaking of a commodity: Intermediation and the entanglement of power cables in Nigeria

Nigerians once trusted power cables to be safe and compliant with international standards. Today, however, the Nigerian market is rife with substandard cables, which may overheat, shoot out sparks, and cause fires. Power cables have been transformed from commodities with stable and precisely defined properties into entangled objects that can only be known through the actors accompanying them. Marketization scholarship has conventionally focused on efforts and investments to disentangle things from their networks of connections, affording less attention to the specifics of how entanglements are produced. This article examines the role of intermediation in creating entanglements and undermining market orders. The analysis first identifies intermediaries that endeavor to translate the market logic into concrete realities in Nigeria. The second and main part of the analysis draws upon data from ethnographic fieldwork in Nigeria and China to assess how intermediaries destabilized the commodity of cables by forging new connections between traders and producers and by enabling inferior products to enter the market. The article proposes intermediation as a meso-level concept for connecting concrete and empirically observable events to theories of marketization. The approach moves marketization scholarship forward and away from its oft-vague operationalizations, while also suggesting new avenues for research on intermediation beyond the study of markets.