Explaining Crypto Trading: Welcome to the Jungle

Excitement, fear, greed, chaos, that rush of adrenaline…markets bring out our animal spirits, and they’re often intimidating. In the second installment of The Markets Series, we tackle the makings of a trade and conceptualize execution to empower you with the knowledge to navigate the market.

Trading: Matches made in…a market between a buyer and a seller

Our first post provided background information on markets and orderbooks. We described a market as a place where buyers and sellers come together to exchange goods and services, or with respect to Kraken, digital assets. We also defined an orderbook as an advertised list of bids (instructions to buy an asset) and asks (instructions to sell an asset). It works just like your average Craigslist post, where someone advertises their interest in selling that Pokemon card we all thought was rare for a measly $5. 

A trade is simply a confirmed exchange of two assets, and it takes place when a bid and an ask agree on price. Sometimes we refer to a trade as an execution, short for an executed order. Every transaction requires a buyer and a seller; after all, nothing can be exchanged in a room of only buyers (or sellers)! 

If a bid or ask cannot find an immediate counterpart, then it gets added to the orderbook (see Figure 1). This allows other traders to see outstanding orders and determine if they want to provide the other side of a transaction.

Trade History

We’re all guilty of wanting to know what prices others have paid previously. Luckily, most platforms, including Kraken, log every trade that takes place on the exchange in the trade history: a record of executed trades, stored in chronological order (see Figure 2).

As you can see in Figure 2, each record has a price, volume, and time. Buy (green) or sell (red) is indicated by color. For instance, the first row shows that a bid was executed at $6,706.70 for 0.00560825 BTC, at 10:05:30. Similarly, the second row shows that another bid was executed at the same price but three seconds earlier than the first order, for 1 BTC. 

Kraken’s trade history records the following information and is made available via our API:

• price: the price resulting in the execution;
• volume: how much of the asset (e.g. bitcoin) was exchanged in the trade;
• time: the recorded timestamp for each trade;
• buy/sell: an indicator for whether the taker was a buyer or a seller in the transaction; and
• market/limit: the order type  

The trade history is useful for qualitatively assessing market activity and efficiency.

Examples include…

• Trade histories with very few entries or infrequent activity may signal that a particular market is not an attractive venue for buyers and sellers to trade. 
• Dramatic changes in prices between each trade, within a short time frame, may indicate a volatile market that lacks liquidity (topics we will cover in a future post).

In summary, a trade is a confirmation of a buyer and a seller coming together and agreeing on a price for exchange. Trades are also logged in a trade history, which can help you make quick judgments on the quality of a market.

Price-Time Priority

Now, you may ask how bids and asks are organized on the orderbook. Well, they are matched on price-time priority. This means that orders are first ranked by price and then by time. For buy orders, bids with higher prices rank higher. For sell orders, asks with lower prices rank higher. If two traders enter an order to buy (or sell) an asset at the same price level, the trader who entered the order instruction earliest will be first in line.

Series 1: Price

Orders are prioritized by price.

Series 2: Price-Time

Orders are first prioritized by price, as shown in Series 1 above. If multiple orders are placed at the same price, then they are prioritized by time, meaning whoever transmits the order earliest will remain ahead in line to be matched with a seller.

Stay tuned!

So far we’ve outlined the basics on markets, orderbooks, and trading. We described markets and orderbooks as a place for traders to advertise bids and asks. In this post, we defined a trade as an exchange made between a buyer and seller, and discussed how different orders are prioritized in the making of a trade. In our next post, we will discuss how traders balance different trading risks in executing a trade, before moving on to more complex market structure analysis.

The Markets Series – Part 1: Markets & Orderbooks

The Markets Series – Part 3: Crypto Trade Execution – What Type of Trader are You?

The Markets Series – Part 4: Liquidity & Market Impact

The Markets Series – Part 5: DeBunking Misconceptions

The Markets Series – Part 6: How To Spot Bad Markets

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