liquidity metrics, the volume existence

In this article, we are going to discuss “the volume existence metric” as a measure of liquidity metric in crypto assets, in order to compare different pairs in different exchanges, why this metric matters and what does it mean?

what is the volume existence metric?

What the “Price Existence Metric” does not consider is the effect of volume on liquidity. Hypothetically, one may place an order with the price of the market maker but with twice the volume available in the whole order book. This is clear that the order would not execute completely, or it might take some time for the market to fill the order quantity, decreasing liquidity.

what role can a market maker play?

As mentioned earlier, liquidity depends on both the price and the available volume. Liquidity will be maximized if one can execute orders regardless of both price and volume. Orders of a market maker not only should cover price gaps but also provide the volume demand.

As shown below, the more volume available surrounding the last trade price, the more liquid the pair is. Different strategies may take place depending on the initial ratio of the market making assets.

volume existence strategies

volume existence strategies

How to calculate volume existence metric?

This KPI can be calculated based on the quantity of orders executed per pair when compared to the order book’s cumulative volume surrounding the last trade price. For example, if most(more than 90%) of orders are executed with quantities below X and at the same time order book’s cumulative volume is Y, if their proportion(YX) grows, the pair is becoming more liquid with regards to volume existence. The ratio itself has significance and can be compared amongst two different pairs or one pair in different exchanges; meaning the one with a higher ratio is more liquid.

 

We have also published some other liquidity metrics in QuantVan’s blog which contains two other liquidity metrics such as bid/ask spread and price existence. You can also write your own algorithms here in QuantVan’s algorithmic trading platform. There are also tutorial videos here.