What is all the activity on the trading exchange order book?

January 28, 2021 11:13 AM

I’ve been following some cryptocurrencies on a well-known and popular exchange. There are some trading pairs (eg DOT/AUS) that don’t have a lot of activity - perhaps trades happening only every 20 minutes or so. However the order book is fluctuating constantly with the market depth indicators varying basically all the time. The order book is an indication of people who have placed a limit order, either buy or sell, correct? So who and why are they changing quite as frequently as I’m seeing if the trading activity is so slow. I understand there is a lot of automation (bots) in the market these days but is that really the cause of the constant activity in seldomly traded pairs? And if so, based on what factors? I must be missing or misunderstanding something. Any insight gratefully received - thanks.
posted by Xhris to Work & Money (2 answers total)

Best answer: I don't think you are missing anything. Bots, algos, black boxes, automation is the cause of the fluctuation in the bids and offers. They can enter and cancel orders in nano seconds and they do. There decision, while secret are generally based on their current portfolios, what certain indicators are doing, and on other inputs. You may be following the dollar v the Canadian dollar, but the algo is long the Aussie dollar so is willing to offer either of the US or CAN dollars. They could be long oil for all we know and want to sell a currency against or buy if the spread is right.

There is a huge difference between bidding and buying, offering and actually selling. As a former floor trader and now upstairs trader, bids and offers are almost meaningless. It is liquidity that matters. Where will an actual trade take place? The problem too is not total volume, it is number of transactions AND volume. As an independent trader, you cannot usually get in on a big spread print between say Goldman and a client hedge fund. If they put up a million spreads but you cannot get in on say 100, the volume is meaningless. If they are working an order and piecing it out over time or price or both, and you can participate, then the volume becomes more meaningful. I would rather see an instrument trade 1 million units over 1,000 trades than 2 million over 20 trades.

I do not trade the Cryptos, (someone is going to make money there, but not me. Don't like the liquidity risk), but it is my understanding that there are liquidity gaps. Your description of the lack of trades yet constant changing of the bids and offers is a good example of that.

The concern is not just getting in at a price your are comfortable with, but how are you going to get out? If the spread goes to whatever you think is fair value or over valued, who is going to buy it from you or sell it to you? As a former Specialist Clerk and Market Maker, the key to developing a new product's market is liquidity.
posted by AugustWest at 12:15 PM on January 28, 2021 [1 favorite]

You should also be aware that most crypto exchanges, even "established" ones, are barely more than fraud mechanisms for the members. While I think that AugustWest's comment covers most of it, I wouldn't actually be surprised to hear that much of the apparent book was spoofed, and by the exchange or favored partners itself.
posted by praemunire at 5:36 PM on January 28, 2021 [2 favorites]