Do backrun auctions protect traders?

Andrew W. Macpherson

Papers from arXiv.org

Abstract: We study a new "laminated" queueing model for orders on batched trading venues such as decentralised exchanges. The model aims to capture and generalise transaction queueing infrastructure that has arisen to organise MEV activity on public blockchains such as Ethereum, providing convenient channels for sophisticated agents to extract value by acting on end-user order flow by performing arbitrage and related HFT activities. In our model, market orders are interspersed with orders created by arbitrageurs that under idealised conditions reset the marginal price to a global equilibrium between each trade, improving predictability of execution for liquidity traders. If an arbitrageur has a chance to land multiple opportunities in a row, he may attempt to manipulate the execution price of the intervening market order by a probabilistic blind sandwiching strategy. To study how bad this manipulation can get, we introduce and bound a price manipulation coefficient that measures the deviation from global equilibrium of local pricing quoted by a rational arbitrageur. We exhibit cases in which this coefficient is well approximated by a "zeta value' with interpretable and empirically measurable parameters.

Date: 2024-01
New Economics Papers: this item is included in nep-gth and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2401.08302 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2401.08302

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().