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

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.