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Optimal trade execution in cryptocurrency markets

Author

Listed:
  • Nils Bundi

    (Zurich University of Applied Sciences)

  • Ching-Lin Wei

    (Shin Kong Life Insurance Co., Ltd)

  • Khaldoun Khashanah

    (Stevens Institute of Technology)

Abstract

Novel technologies allow cryptocurrency exchanges to offer innovative services that set them apart from other exchanges. In this paper we study the distinct features of cryptocurrency fee schedules and the implications for optimal trade execution. We formulate an optimal execution strategy that minimizes the trading fees charged by the exchange. We further provide a proof for the existence of an optimal execution strategy for this type of fee schedule. The optimal strategy involves both market and limit orders on various price levels. The optimal order distribution scheme depends on the market conditions expressed in terms of the distribution of limit order execution probabilities and the exchange’s specific configuration of the fee schedule. Our results indicate that a strategy kernel with an exponentially decaying allocation of trade volume to price levels further away from the best price provides superior performance and potential reduction of trade execution cost of more than 60%. The robustness of these results is confirmed in an empirical study. To our knowledge, this is the first study of optimal trade execution that takes into consideration the full fee schedule of exchanges in general.

Suggested Citation

  • Nils Bundi & Ching-Lin Wei & Khaldoun Khashanah, 2024. "Optimal trade execution in cryptocurrency markets," Digital Finance, Springer, vol. 6(2), pages 283-318, June.
    • Handle: RePEc:spr:digfin:v:6:y:2024:i:2:d:10.1007_s42521-023-00103-y
    DOI: 10.1007/s42521-023-00103-y
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    References listed on IDEAS

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    More about this item

    Keywords

    Cryptocurrencies; Market microstructure; Limit order book; Maker taker market;
    All these keywords.

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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