Liquid Speed: On-Demand Fast Trading at Distributed Exchanges
30 Pages Posted: 26 Jul 2019 Last revised: 7 Nov 2019
Date Written: July 24, 2019
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: Suggested Citation