Optimal trade execution in cryptocurrency markets

Nils Bundi (), Ching-Lin Wei () and Khaldoun Khashanah ()
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Nils Bundi: Zurich University of Applied Sciences
Ching-Lin Wei: Shin Kong Life Insurance Co., Ltd
Khaldoun Khashanah: Stevens Institute of Technology

Digital Finance, 2024, vol. 6, issue 2, No 4, 283-318

Abstract: 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.

Keywords: Cryptocurrencies; Market microstructure; Limit order book; Maker taker market (search for similar items in EconPapers)
JEL-codes: D47 G11 G12 G14 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s42521-023-00103-y

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