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on Market Microstructure |
| By: | Juan Plazuelo Pascual; Carlos Tardon Rubio; Juan Toro Cebada; Angel Hernando Veciana |
| Abstract: | This document analyzes price discovery in cryptocurrency markets by comparing centralized and decentralized exchanges, as well as spot and futures markets. The study focuses first on Ethereum (ETH) and then applies a similar approach to Bitcoin (BTC). Chapter 1 outlines the theoretical framework, emphasizing the structural differences between centralized exchanges and decentralized finance mechanisms, especially Automated Market Makers (AMMs). It also explains how to construct an order book from a liquidity pool in a decentralized setting for comparison with centralized exchanges. Chapter 2 describes the methodological tools used: Hasbrouck's Information Share, Gonzalo and Granger's Permanent-Transitory decomposition, and the Hayashi-Yoshida estimator. These are applied to explore lead-lag dynamics, cointegration, and price discovery across market types. Chapter 3 presents the empirical analysis. For ETH, it compares price dynamics on Binance and Uniswap v2 over a one-year period, focusing on five key events in 2024. For BTC, it analyzes the relationship between spot and futures prices on the CME. The study estimates lead-lag effects and cointegration in both cases. Results show that centralized markets typically lead in ETH price discovery. In futures markets, while they tend to lead overall, high-volatility periods produce mixed outcomes. The findings have key implications for traders and institutions regarding liquidity, arbitrage, and market efficiency. Various metrics are used to benchmark the performance of modified AMMs and to understand the interaction between decentralized and centralized structures. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.08718 |
| By: | Leonardo Baggiani; Martin Herdegen; Leandro S\'anchez-Betancourt |
| Abstract: | Automated Market Makers (AMMs) are emerging as a popular decentralised trading platform. In this work, we determine the optimal dynamic fees in a constant function market maker. We find approximate closed-form solutions to the control problem and study the optimal fee structure. We find that there are two distinct fee regimes: one in which the AMM imposes higher fees to deter arbitrageurs, and another where fees are lowered to increase volatility and attract noise traders. Our results also show that dynamic fees that are linear in inventory and are sensitive to changes in the external price are a good approximation of the optimal fee structure and thus constitute suitable candidates when designing fees for AMMs. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.02869 |
| By: | Yang Li; Zhi Chen; Steve Yang |
| Abstract: | High-frequency trading (HFT) is an investing strategy that continuously monitors market states and places bid and ask orders at millisecond speeds. Traditional HFT approaches fit models with historical data and assume that future market states follow similar patterns. This limits the effectiveness of any single model to the specific conditions it was trained for. Additionally, these models achieve optimal solutions only under specific market conditions, such as assumptions about stock price's stochastic process, stable order flow, and the absence of sudden volatility. Real-world markets, however, are dynamic, diverse, and frequently volatile. To address these challenges, we propose the FlowHFT, a novel imitation learning framework based on flow matching policy. FlowHFT simultaneously learns strategies from numerous expert models, each proficient in particular market scenarios. As a result, our framework can adaptively adjust investment decisions according to the prevailing market state. Furthermore, FlowHFT incorporates a grid-search fine-tuning mechanism. This allows it to refine strategies and achieve superior performance even in complex or extreme market scenarios where expert strategies may be suboptimal. We test FlowHFT in multiple market environments. We first show that flow matching policy is applicable in stochastic market environments, thus enabling FlowHFT to learn trading strategies under different market conditions. Notably, our single framework consistently achieves performance superior to the best expert for each market condition. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.05784 |
| By: | Spyros Galanis |
| Abstract: | No trade theorems examine conditions under which agents cannot agree to disagree on the value of a security which pays according to some state of nature, thus preventing any mutual agreement to trade. A large literature has examined conditions which imply no trade, such as relaxing the common prior and common knowledge assumptions, as well as allowing for agents who are boundedly rational or ambiguity averse. We contribute to this literature by examining conditions on the private information of agents that reveals, or verifies, the true value of the security. We argue that these conditions can offer insights in three different settings: insider trading, the connection of low liquidity in markets with no trade, and trading using public blockchains and oracles. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.04944 |
| By: | Haochuan (Kevin); Wang |
| Abstract: | Cryptocurrency price dynamics are driven largely by microstructural supply demand imbalances in the limit order book (LOB), yet the highly noisy nature of LOB data complicates the signal extraction process. Prior research has demonstrated that deep-learning architectures can yield promising predictive performance on pre-processed equity and futures LOB data, but they often treat model complexity as an unqualified virtue. In this paper, we aim to examine whether adding extra hidden layers or parameters to "blackbox ish" neural networks genuinely enhances short term price forecasting, or if gains are primarily attributable to data preprocessing and feature engineering. We benchmark a spectrum of models from interpretable baselines, logistic regression, XGBoost to deep architectures (DeepLOB, Conv1D+LSTM) on BTC/USDT LOB snapshots sampled at 100 ms to multi second intervals using publicly available Bybit data. We introduce two data filtering pipelines (Kalman, Savitzky Golay) and evaluate both binary (up/down) and ternary (up/flat/down) labeling schemes. Our analysis compares models on out of sample accuracy, latency, and robustness to noise. Results reveal that, with data preprocessing and hyperparameter tuning, simpler models can match and even exceed the performance of more complex networks, offering faster inference and greater interpretability. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.05764 |
| By: | Guillaume Maitrier; Jean-Philippe Bouchaud |
| Abstract: | In this work, we aim to reconcile several apparently contradictory observations in market microstructure: is the famous ''square-root law'' of metaorder impact that decays with time compatible with the random-walk nature of prices and the linear impact of order imbalances? Can one entirely explain the volatility of prices as resulting from the flow of uninformed metaorders that mechanically impact prices? We introduce a new theoretical framework to describe metaorders with different signs, sizes and durations, which all impact prices as a square-root of volume but with a subsequent time decay. We show that, as in the original propagator model, price diffusion is ensured by the long memory of cross-correlations between metaorders. In order to account for the effect of strongly fluctuating volumes $q$ of individual trades, we further introduce two $q$-dependent exponents, which allows us to account for the way the moments of generalized volume imbalance and the correlation between price changes and generalized order flow imbalance scales with $T$. We predict in particular that the corresponding power-laws depend in a non-monotonic fashion on a parameter $a$ that allows one to put the same weight on all child orders or overweight large orders, a behaviour clearly borne out by empirical data. We also predict that the correlation between price changes and volume imbalances should display a maximum as a function of $a$, which again matches observations. Such noteworthy agreement between theory and data suggests that our framework correctly captures the basic mechanism at the heart of price formation, namely the average impact of metaorders. We argue that our results support the ''Order-Driven'' theory of excess volatility, and are at odds with the idea that a ''Fundamental'' component accounts for a large share of the volatility of financial markets. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.07711 |
| By: | J\k{e}drzej Maskiewicz; Pawe{\l} Sakowski |
| Abstract: | The paper explores the use of Deep Reinforcement Learning (DRL) in stock market trading, focusing on two algorithms: Double Deep Q-Network (DDQN) and Proximal Policy Optimization (PPO) and compares them with Buy and Hold benchmark. It evaluates these algorithms across three currency pairs, the S&P 500 index and Bitcoin, on the daily data in the period of 2019-2023. The results demonstrate DRL's effectiveness in trading and its ability to manage risk by strategically avoiding trades in unfavorable conditions, providing a substantial edge over classical approaches, based on supervised learning in terms of risk-adjusted returns. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.04658 |