Published in · 6 min read · Jan 21, 2020
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Written by Clara Medalie, Research by Anastasia Melachrinos
Over the next few weeks, we will be introducing a series of API tutorials to better explain our recently launched suite of order book API endpoints. These tutorials are designed to give real-world demonstrations for how our order book data can be used by traders and researchers to better understand cryptocurrency market dynamics.
What is market depth?
As a reminder, market depth is broadly defined as the market’s ability to sustain relatively large market orders without impacting the price of the asset. Market depth considers the overall level and breadth of open orders and is calculated from the number of buy and sell orders at various price levels on each side of the mid price. The market depth for a given pair indicates the “Volume at Stake,” or the order volume present on an exchange’s order book with a non-negligible probability of being executed as a trade.
Typically, market depth is closely associated with liquidity (the degree to which an asset can be quickly bought or sold on a marketplace at stable prices). If market depth is “deep” for a given currency pair, this means that there is sufficient volume of open orders on either the bid or ask side, which ultimately makes it easier to exchange the asset at prices reflecting its intrinsic value. The weaker a market’s depth, the easier it is for larger market orders to move the price, which negatively impacts traders.
It is important to have an idea of a market’s depth before trading because relying on trade volume alone is often not sufficient for understanding a market’s liquidity (especially in cryptocurrency markets). Order book data allows traders to gain insights about cryptocurrency market dynamics not immediately apparent from trade data.
Calculation
The calculation for market depth is simply the cumulative volume of the base asset at various percentages from the mid price. For example, the “Bid Volume 10%” for BTC/USD on Coinbase would represent the volume of all bids for BTC falling within 10% of the mid price at which the order book snapshot was taken. To calculate the depth, we would add up the volume of all bids placed within this 10% price range. Conversely, the “Ask Volume 10%” would be the volume of all asks within 10% of the mid price.
API Usage
Endpoints: Order Book Snapshots: Full, Order Book Snapshots: Depth, Order Book Aggregations: Depth
Parameters:
Instrument: The market you are interested in (e.g. for BTC/USD)
Exchange: The exchange you are interested in (e.g. Coinbase)
Start_time : the date you want to begin receiving data from
End_time: The date until which you want to receive data
Interval (only ‘Aggregations: Depth’): the time interval of the aggregation ranging from 1 minute to 1 day. The data returned will be the simple average of our order book snapshots over the specified period.
Example request: https://us.market-api.kaiko.io/v1/data/order_book_snapshots.v1/exchanges/cbse/spot/btc-usd/snapshots/depth?page_size=1
Response: Ask Volume and Bid Volume ranging from .1% to 10%
Examples
Below, we have several examples of the types of research that can be done using our Market Depth API endpoints for 8 selected exchanges:
Bitfinex, Bitflyer, Bittrex, Bitstamp, Coinbase, Gemini, Itbit, Kraken
- We look at the Bid and Ask Volume 10% from January 3 -17 for a chosen pair (we choose BTC/USD because of historically high traded volumes). We observe different and sometimes contrasting volume trends over the same period on some exchanges. The market depth can be used as an indicator of a market’s liquidity, allowing investors to compare exchanges and pick which markets will give them the highest profitability.
2. Bid-Ask Spread across exchanges for BTC/USD and ETH/USD from January 3–17. The spread is available through Order Book Snapshots: Full, and is calculated by taking the difference between the best bid and best ask of an order book snapshot. To compare BTC/USD and ETH/USD, we divide the spread by the midprice to obtain a standardized unit of measurement that can be applied to both pairs, which normalizes price differences between them. Spread/midprice makes it easier to compare liquidity between different markets.
Typically, the smaller the spread the more liquid the market is. Bid-Ask spread is a reflection of the demand and supply for an asset, with the bids reflecting demand and the asks reflecting supply. The market depth can impact the spread — if the Ask Volume significantly outweighs the Bid Volume or the combined Bid/Ask Volume is weak, this frequently correlates with a wider spread.
We can visually observe correlations between market depth and spread on the charts above. For example, the Bid and Ask Volume 10% for BTC/USD on Coinbase between January 6–7 were nearly equal. By looking at the BTC/USD spread during this time, we can note that the spread decreased. When the difference between Bid and Ask Volume widened, the spreads widened as well.
3. For a comparison in whole volume units, we can use the sum of both Bid and Ask Volume 10% across exchanges from Order Book Snapshots: Depth. The unit in the two graphs below is in ETH and BTC, respectively.
*Gemini and Bittrex order book snapshots are not 10% (the snapshots we collect), thus can be disregarded in the charts above. All other depth calculations are accurate.
4. Hourly aggregations for Bid-Ask Volume 10% from January 3–17 using Order Book Aggregations: Depth. The charts below take the average market depth for each hour of the day over the course of two weeks. With this type of aggregation, traders can identify the average time of day where order book volume is highest or lowest. In the below figures, there is no significant change in market depth over the course of the day. However, small differences can be noted between the time of ETH/USD trading on Itbit. Many cryptocurrency markets are global and highly automated, with consistent trading during the day and night, which is why there may be no significant changes.
Some exchanges restrict user access (such as the South Korean exchanges); thus, there may be more observable differences in market depth over the course of the day when traders are confined to a particular geographic location.
Conclusion
The above charts are designed to demonstrate how our order book endpoints can be used to study cryptocurrency order book dynamics. We tried not to draw conclusions from the charts, opting to only display the data visually to allow our readers and API users a chance to draw their own insights. Studying cryptocurrency market dynamics is a complex undertaking that requires access to granular and normalized market data. We have designed our API endpoints to make it easier to work with massive datasets that would otherwise be inaccessible to the average trader.
Want to test our order book API endpoints? Reach out at hello@kaiko.com!
Additional Information:
Website: www.kaiko.com
Documentation: https://docs.kaiko.com/#introduction
API: https://www.kaiko.com/pages/market-data-api
Historical Data: https://www.kaiko.com/pages/historical-data
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Blog: https://blog.kaiko.com/
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