Conventional data feeds from exchanges, even L3 feeds, generally only tell one what happened: accepted submissions of maker and taker orders, cancellations, and the evolution of the order book and the best bid and ask prices. However, by analyzing a dataset derived from the blockchain of the highly liquid cryptocurrency exchange Hyperliquid, we are able to see all messages (4.5 bn in our one-month sample), including rejections. Unexpectedly, almost 60% of message traffic is generated by submission and subsequent rejection of a single order type: post-only limit orders sent to the 'wrong' (aggressive) side of the book, for example a buy limit order at a price at or above the best ask. Such orders are automatically rejected on arrival except in the (rare) case that the price moves up while the order is in transit. Nearly 30% of message traffic relates to cancellations, leaving a small fraction for all other messages.
I shall describe this order flow in detail, then address the question of why message traffic is dominated by rejected submissions which, by their nature, do not influence the order book in any way at all, and are invisible to all traders except the submitter. We propose that the reason lies in a market-making strategy whose aim is to gain queue priority immediately after any price change, and I shall show how the evidence supports this hypothesis. I shall also discuss the risk/return characteristics of the strategy, and finally discuss its pivotal role in replenishing liquidity following a price move.
Joint work with Jakob Albers, Mihai Cucuringu and Alex Shestopaloff.
