On-demand fast trading on decentralized exchanges

Michael Brolley and Marius Zoican

Finance Research Letters, 2023, vol. 51, issue C

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 (search for similar items in EconPapers)
JEL-codes: G10 G14 G23 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:51:y:2023:i:c:s1544612322005281

DOI: 10.1016/j.frl.2022.103350

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