nep-mst New Economics Papers
on Market Microstructure
Issue of 2025–05–19
six papers chosen by
Thanos Verousis, Vlerick Business School


  1. Deep Learning Models Meet Financial Data Modalities By Kasymkhan Khubiev; Mikhail Semenov
  2. Learning the Spoofability of Limit Order Books With Interpretable Probabilistic Neural Networks By Timoth\'ee Fabre; Damien Challet
  3. Optimal Execution in Intraday Energy Markets under Hawkes Processes with Transient Impact By Konstantinos Chatziandreou; Sven Karbach
  4. Can Large Language Models Trade? Testing Financial Theories with LLM Agents in Market Simulations By Alejandro Lopez-Lira
  5. Integrating Blockchain and AI in Financial Systems: A Case Study on Cross-Border Payments and High-Frequency Trading Synergies By Han, Li
  6. Microstructure and Manipulation: Quantifying Pump-and-Dump Dynamics in Cryptocurrency Markets By Mahya Karbalaii

  1. By: Kasymkhan Khubiev; Mikhail Semenov
    Abstract: Algorithmic trading relies on extracting meaningful signals from diverse financial data sources, including candlestick charts, order statistics on put and canceled orders, traded volume data, limit order books, and news flow. While deep learning has demonstrated remarkable success in processing unstructured data and has significantly advanced natural language processing, its application to structured financial data remains an ongoing challenge. This study investigates the integration of deep learning models with financial data modalities, aiming to enhance predictive performance in trading strategies and portfolio optimization. We present a novel approach to incorporating limit order book analysis into algorithmic trading by developing embedding techniques and treating sequential limit order book snapshots as distinct input channels in an image-based representation. Our methodology for processing limit order book data achieves state-of-the-art performance in high-frequency trading algorithms, underscoring the effectiveness of deep learning in financial applications.
    Date: 2025–04
    URL: https://d.repec.org/n?u=RePEc:arx:papers:2504.13521
  2. By: Timoth\'ee Fabre; Damien Challet
    Abstract: This paper investigates real-time detection of spoofing activity in limit order books, focusing on cryptocurrency centralized exchanges. We first introduce novel order flow variables based on multi-scale Hawkes processes that account both for the size and placement distance from current best prices of new limit orders. Using a Level-3 data set, we train a neural network model to predict the conditional probability distribution of mid price movements based on these features. Our empirical analysis highlights the critical role of the posting distance of limit orders in the price formation process, showing that spoofing detection models that do not take the posting distance into account are inadequate to describe the data. Next, we propose a spoofing detection framework based on the probabilistic market manipulation gain of a spoofing agent and use the previously trained neural network to compute the expected gain. Running this algorithm on all submitted limit orders in the period 2024-12-04 to 2024-12-07, we find that 31% of large orders could spoof the market. Because of its simple neuronal architecture, our model can be run in real time. This work contributes to enhancing market integrity by providing a robust tool for monitoring and mitigating spoofing in both cryptocurrency exchanges and traditional financial markets.
    Date: 2025–04
    URL: https://d.repec.org/n?u=RePEc:arx:papers:2504.15908
  3. By: Konstantinos Chatziandreou; Sven Karbach
    Abstract: This paper investigates optimal execution strategies in intraday energy markets through a mutually exciting Hawkes process model. Calibrated to data from the German intraday electricity market, the model effectively captures key empirical features, including intra-session volatility, distinct intraday market activity patterns, and the Samuelson effect as gate closure approaches. By integrating a transient price impact model with a bivariate Hawkes process to model the market order flow, we derive an optimal trading trajectory for energy companies managing large volumes, accounting for the specific trading patterns in these markets. A back-testing analysis compares the proposed strategy against standard benchmarks such as Time-Weighted Average Price (TWAP) and Volume-Weighted Average Price (VWAP), demonstrating substantial cost reductions across various hourly trading products in intraday energy markets.
    Date: 2025–04
    URL: https://d.repec.org/n?u=RePEc:arx:papers:2504.10282
  4. By: Alejandro Lopez-Lira
    Abstract: This paper presents a realistic simulated stock market where large language models (LLMs) act as heterogeneous competing trading agents. The open-source framework incorporates a persistent order book with market and limit orders, partial fills, dividends, and equilibrium clearing alongside agents with varied strategies, information sets, and endowments. Agents submit standardized decisions using structured outputs and function calls while expressing their reasoning in natural language. Three findings emerge: First, LLMs demonstrate consistent strategy adherence and can function as value investors, momentum traders, or market makers per their instructions. Second, market dynamics exhibit features of real financial markets, including price discovery, bubbles, underreaction, and strategic liquidity provision. Third, the framework enables analysis of LLMs' responses to varying market conditions, similar to partial dependence plots in machine-learning interpretability. The framework allows simulating financial theories without closed-form solutions, creating experimental designs that would be costly with human participants, and establishing how prompts can generate correlated behaviors affecting market stability.
    Date: 2025–04
    URL: https://d.repec.org/n?u=RePEc:arx:papers:2504.10789
  5. By: Han, Li
    Abstract: This paper investigates the synergistic integration of blockchain and artificial intelligence (AI) in financial systems, with emphasis on security, transparency, and operational efficiency. The study analyzes blockchain’s decentralized ledger mechanism and AI’s anomaly detection algorithms in enhancing fraud prevention and regulatory compliance. It explores the application of these technologies in cross-border payments and high-frequency trading (HFT), demonstrating their impact on settlement time reduction, transaction cost minimization, and market execution precision. Case studies include the role of Ripple and Stellar in decentralized remittance systems and AI optimization in algorithmic trading strategies. The paper also addresses limitations such as regulatory divergence, technological interoperability, model risk, and cybersecurity vulnerabilities, highlighting implementation challenges in financial infrastructures.
    Date: 2025–04–16
    URL: https://d.repec.org/n?u=RePEc:osf:osfxxx:2mn3f_v1
  6. By: Mahya Karbalaii
    Abstract: Building on our prior threshold-based analysis of six months of Poloniex trading data, we have extended both the temporal span and granularity of our study by incorporating minute-level OHLCV records for 1021 tokens around each confirmed pump-and-dump event. First, we algorithmically identify the accumulation phase, marking the initial and final insider volume spikes, and observe that 70% of pre-event volume transacts within one hour of the pump announcement. Second, we compute conservative lower bounds on insider profits under both a single-point liquidation at 70% of peak and a tranche-based strategy (selling 20% at 50%, 30% at 60%, and 50% at 80% of peak), yielding median returns above 100% and upper-quartile returns exceeding 2000%. Third, by unfolding the full pump structure and integrating social-media verification (e.g., Telegram announcements), we confirm numerous additional events that eluded our initial model. We also categorize schemes into "pre-accumulation" versus "on-the-spot" archetypes-insights that sharpen detection algorithms, inform risk assessments, and underpin actionable strategies for real-time market-integrity enforcement.
    Date: 2025–04
    URL: https://d.repec.org/n?u=RePEc:arx:papers:2504.15790

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