On-Demand Fast Trading on Decentralized Exchanges

15 Pages Posted: 4 Aug 2022 Last revised: 14 Sep 2022

See all articles by Michael Brolley

Michael Brolley

Wilfrid Laurier University - Lazaridis School of Business and Economics

Marius Zoican

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

Date Written: August 1, 2022

Abstract

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

Suggested Citation

Brolley, Michael and Zoican, Marius, On-Demand Fast Trading on Decentralized Exchanges (August 1, 2022). Finance Research Letters, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4178288 or http://dx.doi.org/10.2139/ssrn.4178288

Michael Brolley

Wilfrid Laurier University - Lazaridis School of Business and Economics ( 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.com

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