Information Transmission across Cryptocurrency Markets and the Role of the Blockchain

Abstract

The time between order submission and order confirmation is crucial for high frequency traders as they risk slippage when latency is too high. We hypothesize that high latency in cryptocurrency markets implies correlations well below one across exchanges at high frequencies. To evaluate this conjecture, we measure the correlation of returns across exchanges at increasing sampling frequencies. Since all exchanges trade the same asset, correlations must eventually approach one. However, at high frequencies, correlations are close to zero. The correlation is approaching one after about 10 minutes which we link to the median confirmation time on the blockchain highlighting the importance of the underlying blockchain design. The analysis also shows considerable differences of cryptocurrency trading with stock market trading.

Keywords: Bitcoin, cryptocurrencies, blockchain, market efficiency, latency, sampling frequency