Trading Stocks on Blocks - The Quality of Decentralized Markets

FinteQC 2018 - The first annual conference on Fintech and Banking Transformation, June 20-21, 2018, Lévis (Québec)

CCConf 2018 - 2nd Berlin Conference: Crypto-Currencies in a Digital Economy November 29 - 30, 2018, Berlin

KIT Working Paper in Economics No. 129

67 Pages Posted: 7 Feb 2019 Last revised: 6 Mar 2019

See all articles by Benedikt Notheisen

Benedikt Notheisen

Karlsruhe Institute of Technology

Vincenzo Marino

affiliation not provided to SSRN

Daniel Englert

affiliation not provided to SSRN

Christof Weinhardt

Karlsruhe Institute of Technology

Date Written: January 25, 2019

Abstract

The trust-free nature of blockchain-based systems challenges the role of traditional platform providers and enables the creation of new, intermediary-free markets. Despite the growing number of such markets, the impact of the blockchain's configuration on market outcomes remains unclear. In this study, we utilize order-level data from real-world financial markets to explore the impact of the blockchain parameters block size and block creation time on the quality of decentralized markets. More specifically, we find that increasing the blocks' capacity improves market activity, while higher block frequencies impose a trade-off between higher turnovers and lower trade sizes. In addition, we identify the block creation time and block size as core drivers of daily and intraday liquidity, respectively. In consequence, improving liquidity goes hand in hand with a higher activity. However, the reciprocal relationship between blockchain parameters and the increasing price impact of a block also indicate that faster and bigger blocks are no silver bullet to scale decentralized markets and may facilitate volatility. In total, we contribute an initial, technology-agnostic assessment of the quality of decentralized markets that aims to guide interdisciplinary researchers and innovative practitioners.

Keywords: Decentralized Markets, Blockchain, Market Quality, Market Design, Market Engineering, FinTech

JEL Classification: D47, G14, L86, N2, O16

Suggested Citation

Notheisen, Benedikt and Marino, Vincenzo and Englert, Daniel and Weinhardt, Christof, Trading Stocks on Blocks - The Quality of Decentralized Markets (January 25, 2019). FinteQC 2018 - The first annual conference on Fintech and Banking Transformation, June 20-21, 2018, Lévis (Québec) , CCConf 2018 - 2nd Berlin Conference: Crypto-Currencies in a Digital Economy November 29 - 30, 2018, Berlin, KIT Working Paper in Economics No. 129, Available at SSRN: https://ssrn.com/abstract=3318181

Benedikt Notheisen (Contact Author)

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

Vincenzo Marino

affiliation not provided to SSRN

Daniel Englert

affiliation not provided to SSRN

Christof Weinhardt

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

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