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On-demand fast trading on decentralized exchanges

Author

Listed:
  • Brolley, Michael
  • Zoican, Marius

Abstract

We build a model to show that decentralized exchanges (DEX) require less computing power on average than traditional exchanges to accommodate the demand for high-speed trading services. Centralized exchanges acquire excess processing capacity to accommodate activity surges: The idle capacity’s opportunity cost is an externality of low-latency trading. On DEXs, HFTs bid on gas fees in real-time to acquire time priority from a network of miners. The price of speed surges as HFTs compete during activity bursts. HFT-driven demand for speed peaks higher on DEX, but spans a shorter time interval. On aggregate, DEX infrastructure is more cost-efficient.

Suggested Citation

  • Brolley, Michael & Zoican, Marius, 2023. "On-demand fast trading on decentralized exchanges," Finance Research Letters, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:finlet:v:51:y:2023:i:c:s1544612322005281
    DOI: 10.1016/j.frl.2022.103350
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    References listed on IDEAS

    as
    1. Biais, Bruno & Foucault, Thierry & Moinas, Sophie, 2015. "Equilibrium fast trading," Journal of Financial Economics, Elsevier, vol. 116(2), pages 292-313.
    2. Albert J. Menkveld & Marius A. Zoican, 2017. "Need for Speed? Exchange Latency and Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1188-1228.
    3. Agostino Capponi & Ruizhe Jia, 2021. "The Adoption of Blockchain-based Decentralized Exchanges," Papers 2103.08842, arXiv.org, revised Jul 2021.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    High-frequency trading; FinTech; Decentralized exchanges; Market design;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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