Price Discovery, High-Frequency Trading and Jumps in Bitcoin Markets

Abstract

A later version of this paper has been published in the Journal of Financial Stability (Volume 50, October 2020, Article Number 100776).

When trading volumes are high, bitcoin futures on the Chicago Mercantile Exchange (CME) and -- until recently -- the Chicago Board Options Exchange (CBOE) lead high-frequency bitcoin price formation. During periods of low trading volumes, the futures become decoupled from prices on centralised bitcoin spot exchanges. However, the trading volume on CME futures has been trending upwards and their price discovery role is now highly significant. Basis risk increases following jumps in either spot or futures prices but these are rapidly arbitraged away by high-frequency institutional traders in the futures.

Keywords: Bitcoin Reference Rate (BRR); Coinbase; Kraken; BitStamp; Gemini

JEL Classification: C22, C5, E42, F31, G1, G2