Mid-Price Decay in crypto trading refers to the phenomenon where the theoretical mid-price of an asset (the average of the best bid and best ask) tends to move adversely for a market participant immediately after they execute a large order. Its purpose as a metric is to quantify the implicit cost of trading or the price impact sustained by an order, particularly relevant in illiquid or volatile crypto markets where large trades can significantly shift the order book.
Mechanism
The mechanism involves the immediate adjustment of market prices in response to significant order flow, as liquidity providers and other market participants update their quotes to reflect the new supply-demand dynamics. A large buy order consumes available asks, shifting the mid-price upwards, while a large sell order consumes bids, shifting it downwards, effectively deteriorating the average execution price for subsequent fills or indicating information leakage.
Methodology
The methodology for analyzing mid-price decay uses high-frequency trade and order book data to measure the short-term price movement following an order execution, often comparing the realized execution price to the mid-price before and after the trade. It employs statistical analysis and econometric models to estimate market impact costs, informing optimal order placement strategies, execution algorithm design, and liquidity provision tactics for institutional crypto trading and RFQ platforms.
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