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Liquid Speed: On-Demand Fast Trading at Distributed Exchanges

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  • Michael Brolley
  • Marius Zoican

Abstract

Exchanges acquire excess processing capacity to accommodate trading activity surges associated with zero-sum high-frequency trader (HFT) "duels." The idle capacity's opportunity cost is an externality of low-latency trading. We build a model of decentralized exchanges (DEX) with flexible capacity. On DEX, HFTs acquire speed in real-time from peer-to-peer networks. The price of speed surges during activity bursts, as HFTs simultaneously race to market. Relative to centralized exchanges, HFTs acquire more speed on DEX, but for shorter timespans. Low-latency "sprints" speed up price discovery without harming liquidity. Overall, speed rents decrease and fewer resources are locked-in to support zero-sum HFT trades.

Suggested Citation

  • Michael Brolley & Marius Zoican, 2019. "Liquid Speed: On-Demand Fast Trading at Distributed Exchanges," Papers 1907.10720, arXiv.org.
    • Handle: RePEc:arx:papers:1907.10720
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    References listed on IDEAS

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    Cited by:

    1. Haeringer, Guillaume & Melton, Hayden, 2020. "High Frequency Fairness," MPRA Paper 103907, University Library of Munich, Germany.
    2. Marius Zoican & Sorin Zoican, 2019. "Fragmentation of Distributed Exchanges," Papers 1910.11216, arXiv.org, revised Nov 2019.

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