On-Demand Fast Trading on Decentralized Exchanges
15 Pages Posted: 4 Aug 2022 Last revised: 2 Dec 2022
Date Written: August 1, 2022
We build a model to show that decentralized exchanges (DEX) require less computing power on average than traditional exchanges to accommodate the demand for high-speed trading services. Centralized exchanges acquire excess processing capacity to accommodate activity surges: The idle capacity's opportunity cost is an externality of low-latency trading. On DEXs, HFTs bid on gas fees in real-time to acquire time priority from a network of miners. The price of speed surges as HFTs compete during activity bursts. HFT-driven demand for speed peaks higher on DEX, but spans a shorter time interval. On aggregate, DEX infrastructure is more cost-efficient.
Keywords: high-frequency trading, FinTech, decentralized exchanges, market design
JEL Classification: G10, G14, G23
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