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Detecting Financial Market Manipulation with Statistical Physics Tools

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  • Haochen Li
  • Maria Polukarova
  • Carmine Ventre

Abstract

We take inspiration from statistical physics to develop a novel conceptual framework for the analysis of financial markets. We model the order book dynamics as a motion of particles and define the momentum measure of the system as a way to summarise and assess the state of the market. Our approach proves useful in capturing salient financial market phenomena: in particular, it helps detect the market manipulation activities called spoofing and layering. We apply our method to identify pathological order book behaviours during the flash crash of the LUNA cryptocurrency, uncovering widespread instances of spoofing and layering in the market. Furthermore, we establish that our technique outperforms the conventional Z-score-based anomaly detection method in identifying market manipulations across both LUNA and Bitcoin cryptocurrency markets.

Suggested Citation

  • Haochen Li & Maria Polukarova & Carmine Ventre, 2023. "Detecting Financial Market Manipulation with Statistical Physics Tools," Papers 2308.08683, arXiv.org.
    • Handle: RePEc:arx:papers:2308.08683
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    References listed on IDEAS

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    1. Luisa Mendonça & Alan De Genaro, 2020. "Detection and analysis of occurrences of spoofing in the Brazilian capital market," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 28(3), pages 369-408, March.
    2. Jean-Noel Tuccella & Philip Nadler & Ovidiu c{S}erban, 2021. "Protecting Retail Investors from Order Book Spoofing using a GRU-based Detection Model," Papers 2110.03687, arXiv.org.
    3. Álvaro Cartea & Sebastian Jaimungal & Yixuan Wang, 2020. "Spoofing and Price Manipulation in Order-Driven Markets," Applied Mathematical Finance, Taylor & Francis Journals, vol. 27(1-2), pages 67-98, July.
    4. Yoshihiro Yura & Hideki Takayasu & Didier Sornette & Misako Takayasu, 2014. "Financial Brownian particle in the layered order book fluid and Fluctuation-Dissipation relations," Papers 1401.8065, arXiv.org.
    5. Fabrizio Lillo & J. Doyne Farmer & Rosario N. Mantegna, 2003. "Master curve for price-impact function," Nature, Nature, vol. 421(6919), pages 129-130, January.
    6. Yoshihiro Yura & Hideki Takayasu & Didier Sornette & Misako Takayasu, 2015. "Financial Knudsen number: breakdown of continuous price dynamics and asymmetric buy and sell structures confirmed by high precision order book information," Papers 1508.06024, arXiv.org.
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    Cited by:

    1. Haochen Li & Yi Cao & Maria Polukarov & Carmine Ventre, 2023. "An Empirical Analysis on Financial Markets: Insights from the Application of Statistical Physics," Papers 2308.14235, arXiv.org, revised Jun 2024.

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