Liquid Speed: On-Demand Fast Trading at Distributed Exchanges

30 Pages Posted: 26 Jul 2019 Last revised: 7 Nov 2019

See all articles by Michael Brolley

Michael Brolley

Wilfrid Laurier University

Marius Zoican

University of Toronto at Mississauga - Department of Management; University of Toronto - Rotman School of Management

Date Written: July 24, 2019

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.

Keywords: high-frequency trading, FinTech, decentralized exchanges, market design

JEL Classification: G10, G14, G23

Suggested Citation

Brolley, Michael and Zoican, Marius, Liquid Speed: On-Demand Fast Trading at Distributed Exchanges (July 24, 2019). Rotman School of Management Working Paper No. 3377346. Available at SSRN: https://ssrn.com/abstract=3377346

Michael Brolley

Wilfrid Laurier University ( email )

Lazaridis Hall, 4071
75 University Avenue
Waterloo, Ontario N2L 3C5
Canada

HOME PAGE: http://www.mikerostructure.com

Marius Zoican (Contact Author)

University of Toronto at Mississauga - Department of Management ( email )


Canada

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.mariuszoican.org

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