Cryptocurrency and Blockchain Technology by Shaen Corbet

Author:Shaen Corbet
Language: eng
Format: epub
Publisher: De Gruyter
Published: 2020-08-10T21:01:17.854000+00:00

5

Cryptocurrency specific trading issues

5.1

Undercutting

While the physical trading on cryptocurrency exchanges is comparable to trading on other equity exchanges, relative tick size, the minimum allowable trading price increment expressed as a percentage of the price is much smaller than on equity exchanges. Tick size selection is one of the most important decisions made by an exchange to influence overall market quality. Tick size determines the cost to gain price priority over a standing limit order and dictates the minimum bid-ask spread, a major component of trading cost. As the price of cryptocurrencies rose, and Bitcoin in particular, the relative spread became increasingly small and unconstrained. On most cryptocurrency exchanges is it either one cent (for example, Bitstamp and Coinbase) or ten cents (Bitfinex) which leads to a relative tick size of as low as 0.01 bps when one bitcoin trades around 10,000 USD.

With such a small trading increment, it is relatively inexpensive for traders to improve limit orders by a negligible amount to gain priority, as illustrated in Figure 6. This ‘undercutting’ behaviour dis-incentivizes traders to supply liquidity and encourages them to cross the spread to get executed, leading to lower depth at best quotes and deteriorations in quoted spread.

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