Coexisting Exchange Platforms: Limit Order Books and Automated Market Makers

56 Pages Posted: 22 Mar 2021 Last revised: 2 May 2022

See all articles by Jun Aoyagi

Jun Aoyagi

HKUST, Finance Department

Yuki Ito

affiliation not provided to SSRN

Date Written: March 20, 2021

Abstract

Blockchain-based decentralized exchanges have adopted automated market makers—algorithms that pool liquidity and make it available to liquidity takers by automatically determining prices. We develop a theoretical framework to analyze coexisting market-making structures: a traditional centralized limit-order market and a decentralized automated market. Traders face asymmetric information and endogenously choose trading venues. We show that liquidity on the automated market complements that on the limit-order market. A unique and stable general equilibrium exists with endogenous liquidity on both platforms, and we investigate the impact of adopting automated market makers on asset prices and traders' behavior.

Keywords: decentralized exchanges, automated market makers, limit order books, liquidity, asymmetric information

JEL Classification: G1, D4

Suggested Citation

Aoyagi, Jun and Ito, Yuki, Coexisting Exchange Platforms: Limit Order Books and Automated Market Makers (March 20, 2021). Available at SSRN: https://ssrn.com/abstract=3808755 or http://dx.doi.org/10.2139/ssrn.3808755

Jun Aoyagi (Contact Author)

HKUST, Finance Department ( email )

CA
United States

Yuki Ito

affiliation not provided to SSRN

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