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EdisonCruise
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How to interpret the switching between price and time priority of the limit order?

June 11th, 2020, 3:32 pm

It is known that small tick size assets are more volatile, and the queues on limit order price are relatively short, so that they are filled mainly based on price-priority. For large tick size, the queues are usually much longer and time priority dominant.
However, I find a future on cryptocurrency demonstrates both properties intermittently. About 70% of time, there are long queues on both sides of the best price and the spread is just one tick. About 30% of time the spread is opened and limit order far from the best prices are easy to fill.
Note that the rebate of limit order of this future is much larger than the tick size. This may be a reason for the large tick size effect, but how to interpret the switching between them? Further is there any idea to develop a market making strategy with consideration of this property?
Thank you.
 
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Alan
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Re: How to interpret the switching between price and time priority of the limit order?

June 12th, 2020, 2:10 pm

I have noticed this in watching coinbase trading. Early on, it seemed like the spread opening up was typically associated with a rally. But, now I think it is more balanced. So, a basic question is whether or not the "wide spread", nowadays, is predictive of returns over any horizon? What do you find?  

Another basic question to study might be the lead-lag relationships between the onset of wide spreads at various exchanges. But, presumably existent market makers have studied such things to death, so perhaps you would simply be catching up to basic knowledge.
Last edited by Alan on June 12th, 2020, 2:20 pm, edited 1 time in total.
 
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EdisonCruise
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Re: How to interpret the switching between price and time priority of the limit order?

June 12th, 2020, 2:17 pm

I find the queues are frequently long enough. A market making strategy for large tick asset may be suitable.
 
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Alan
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Re: How to interpret the switching between price and time priority of the limit order?

June 12th, 2020, 4:05 pm

How will you deal with likely manipulation at unregulated foreign venues?
 
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EdisonCruise
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Joined: September 15th, 2012, 4:22 am

Re: How to interpret the switching between price and time priority of the limit order?

June 15th, 2020, 7:37 am

I have no good way to handle the wide spread and manipulation issues now. Maybe those are real challenges and I have to expect a long process of trial and error.
 
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wpai004
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Re: How to interpret the switching between price and time priority of the limit order?

August 13th, 2020, 5:49 am

Maybe I'm missing the point on this but isn't this pretty obvious? When the market is stable with low volatility then the spread is likely to be tight. The fair value of the asset is accurate, with a low margin of error thus market maker quotes are narrow. If the market is is volatile and/or trending aggressively then the spread will widen due to liquidity takers continuously smashing the bid or ask coupled with market makers widening their quotes. The price of the asset is far less certain with a high margin of error.
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