Market Microstructure for Crypto Algo Traders

Most retail traders think about markets in terms of candlestick charts. Professional algorithmic traders think in terms of order flow, queue priority, and adverse selection. Understanding microstructure is what separates mediocre bots from high-performing ones.

The Limit Order Book

Every exchange maintains a limit order book. Bids are buy orders sorted from highest to lowest. Asks are sell orders sorted from lowest to highest. The spread between the best bid and best ask is where your high frequency crypto trading costs live.

Market Impact

Large orders move prices. This is called market impact. When your crypto trading bot sends a large market order, it consumes multiple levels of the book and exits at a worse average price than the top-of-book. Slippage models are how you account for this in your backtests.

Adverse Selection

Limit orders face a danger: informed traders will hit your order precisely when the price is about to move against you. This is adverse selection and it is a hidden cost in every crypto algo trading market-making strategy.