Public Trader Identity: Adverse Selection and Return Predictability
Daojing Zhai
Abstract
Informed traders are supposed to need anonymity: they profit by hiding among the uninformed. A decentralized exchange now publishes the counterparty: every committed order, cancellation, rejection, and fill carries a persistent pseudonymous wallet address. We reconstruct the full-depth limit order book from a record of 17.1 billion messages and 14.3 million aggressive orders by 147,113 wallets, covering $84.3 billion in taker notional. We report three findings. First, informativeness is a persistent wallet attribute. We rank wallets by the price movement that follows their aggressive orders over ten days, and the ranking largely holds over the next ten, with a rank correlation of 0.52. Second, the ranking predicts returns: a linear model using identity information reaches an out-of-sample R2 of 12.31% for one-second returns, a 13.2% gain (t = 9.2) over a standard anonymous benchmark of prices, quotes, and order flow. That gain is 1.6 times the largest gain from 200 activity-matched placebo cohorts. Third, we test the gain at realized trades rather than at every sampled moment, and the identity increment grows from 1.43 to 2.47 percentage points of R2. Public wallet histories therefore carry short-horizon price information that anonymous order-book data leave unmeasured.
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