Paper: arXiv 2305.07559

Abstract

In a financial exchange, market impact is a measure of the price change of an asset following a transaction. This is an important element of market microstructure, which determines the behaviour of the market following a trade. In this paper, we first provide a discussion on the market impact observed in the BTC/USD Futures market, then we present a novel multi-agent market simulation that can follow an underlying price series, whilst maintaining the ability to reproduce the market impact observed in the market in an explainable manner. This simulation of the financial exchange allows the model to interact realistically with market participants, helping its users better estimate market slippage as well as the knock-on consequences of their market actions. In turn, it allows various stakeholders such as industrial practitioners, governments and regulators to test their market hypotheses, without deploying capital or destabilising the system.

Complexity vs Empirical Score

  • Math Complexity: 7.5/10
  • Empirical Rigor: 6.0/10
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper employs advanced concepts from market microstructure theory, including the Propagator model and the Square Root law, which involves non-trivial mathematical modeling. It is empirically rigorous, as it uses real high-frequency LOB data from Binance and implements the simulation within the ABIDES platform to test market hypotheses in a controlled environment.

Research Flowchart

  flowchart TD
  subgraph G["Research Goal"]
      G1["Model Price-Reverting Market Impact<br/>in BTC/USD Futures"]
  end

  subgraph M["Methodology"]
      M1["Multi-Agent Simulation<br/>with Limit Order Book"]
  end

  subgraph D["Data & Inputs"]
      D1["BTC/USD Futures Market Data"]
  end

  subgraph C["Computation"]
      C1["Agent Execution &<br/>Price Reversion Dynamics"]
  end

  subgraph O["Outcomes"]
      O1["Explainable Impact Model"]
      O2["Slippage Estimation Tool"]
      O3["Risk-Free Market Testing<br/>for Stakeholders"]
  end

  G --> M
  M --> D
  D --> C
  C --> O