A comparison of the limit order book and automated market maker
J.C. de Vries (TU Delft - Electrical Engineering, Mathematics and Computer Science)
J.H.M. Anderluh – Mentor (TU Delft - Applied Probability)
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Abstract
All investment firms in Europa must track the market quality of different exchanges and choose the best for their clients. Previous research has shown that a limit order book with additional market makers performs best in terms of market quality, followed by a pure limit order book and market maker. With the rise of cryptocurrencies, a new exchange called the automated market maker has appeared in the crypto markets. It is unclear how it compares to the limit order book regarding market quality. This thesis compares the automated market maker with the limit order book. We have built a simulation and tested seven different scenarios, varying in liquidity, information, price variability and fee. Six out of seven scenarios indicated that the automated market maker outperforms the limit order book.