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Reconciling Open Interest with Traded Volume in Perpetual Swaps

Author

Listed:
  • Ioannis Giagkiozis

    (Chrysor Trading)

  • Emilio Said

    (ADIA - Abu Dhabi Investment Authority)

Abstract

Perpetual swaps are derivative contracts that allow traders to speculate on, or hedge, the price movements of cryptocurrencies. Unlike futures contracts, perpetual swaps have no settlement or expiration in the traditional sense. The funding rate acts as the mechanism that tethers the perpetual swap to its underlying with the help of arbitrageurs. Open interest, in the context of perpetual swaps and derivative contracts in general, refers to the total number of outstanding contracts at a given point in time. It is a critical metric in derivatives markets as it can provide insight into market activity, sentiment and overall liquidity. It also provides a way to estimate a lower bound on the collateral required for every cryptocurrency market on an exchange. This number, cumulated across all markets on the exchange in combination with proof of reserves, can be used to gauge whether the exchange in question operates with unsustainable levels of leverage, which could have solvency implications. We find that open interest in Bitcoin perpetual swaps is systematically misquoted by some of the largest derivatives exchanges; however, the degree varies, with some exchanges reporting open interest that is wholly implausible to others that seem to be delaying messages of forced trades, i.e., liquidations. We identify these incongruities by analyzing tick-by-tick data for two time periods in 2023 by connecting directly to seven of the most liquid cryptocurrency derivatives exchanges.

Suggested Citation

  • Ioannis Giagkiozis & Emilio Said, 2024. "Reconciling Open Interest with Traded Volume in Perpetual Swaps," Post-Print hal-04531639, HAL.
    • Handle: RePEc:hal:journl:hal-04531639
    DOI: 10.5195/LEDGER.2024.325
    Note: View the original document on HAL open archive server: https://hal.science/hal-04531639
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    References listed on IDEAS

    as
    1. Weili Chen & Jun Wu & Zibin Zheng & Chuan Chen & Yuren Zhou, 2019. "Market Manipulation of Bitcoin: Evidence from Mining the Mt. Gox Transaction Network," Papers 1902.01941, arXiv.org.
    2. Kenneth A. Kim & Jungsoo Park, 2010. "Why Do Price Limits Exist in Stock Markets? A Manipulation†Based Explanation," European Financial Management, European Financial Management Association, vol. 16(2), pages 296-318, March.
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