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To Make, or to Take, That Is the Question: Impact of LOB Mechanics on Natural Trading Strategies

Author

Listed:
  • Jakob Albers
  • Mihai Cucuringu
  • Sam Howison
  • Alexander Y. Shestopaloff

Abstract

Working at a very granular level, using data from a live trading experiment on the Binance linear Bitcoin perpetual-the most liquid crypto market worldwide-we examine the effects of (i) basic order book mechanics and (ii) the strong persistence of price changes from the immediate to the short timescale, revealing the interplay between returns, queue sizes, and orders' queue positions. For maker orders, we find a negative correlation between fill likelihood and subsequent short-term returns, posing a significant challenge for maker order-based strategies, while the main hurdle with taker orders is overcoming the taker fee. These dynamics render natural (and commonly-cited) trading strategies highly unprofitable. Finally, we use the understanding gained to identify situations (Reversals) in which a successful trading strategy can operate; we construct a signal for Reversals and demonstrate its efficacy.

Suggested Citation

  • Jakob Albers & Mihai Cucuringu & Sam Howison & Alexander Y. Shestopaloff, 2025. "To Make, or to Take, That Is the Question: Impact of LOB Mechanics on Natural Trading Strategies," Papers 2502.18625, arXiv.org.
    • Handle: RePEc:arx:papers:2502.18625
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    File URL: http://arxiv.org/pdf/2502.18625
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    References listed on IDEAS

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    1. Timothy DeLise, 2024. "The Negative Drift of a Limit Order Fill," Papers 2407.16527, arXiv.org.
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    3. Álvaro Cartea & Ryan Donnelly & Sebastian Jaimungal, 2018. "Enhancing trading strategies with order book signals," Applied Mathematical Finance, Taylor & Francis Journals, vol. 25(1), pages 1-35, January.
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    5. Yacine Aït-Sahalia & Jianqing Fan & Lirong Xue & Yifeng Zhou, 2022. "How and When are High-Frequency Stock Returns Predictable?," NBER Working Papers 30366, National Bureau of Economic Research, Inc.
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    7. Álvaro Cartea & Leandro Sánchez-Betancourt, 2023. "Optimal execution with stochastic delay," Finance and Stochastics, Springer, vol. 27(1), pages 1-47, January.
    8. Martin D. Gould & Julius Bonart, 2015. "Queue Imbalance as a One-Tick-Ahead Price Predictor in a Limit Order Book," Papers 1512.03492, arXiv.org.
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