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on Market Microstructure |
| By: | Andrea Barbon (University of St. Gallen); Angelo Ranaldo (University of St. Gallen) |
| Abstract: | Despite the growing adoption of decentralized exchanges, little is known about their market quality. Using a comprehensive dataset, we compare decentralized blockchain-based venues (DEXs) to centralized crypto exchanges (CEXs) assessing two aspects of market quality: price efficiency and market liquidity. We find that CEXs provide better market quality and identify the main friction dampening DEX efficiency as the high gas price stemming from proof-of-work blockchains. We propose and empirically validate a stylized model of DEX liquidity provision, linking trading volume, protocol fees, and liquidity. We identify quantitative conditions needed for DEXs to overtake CEXs in the future. |
| Keywords: | Decentralized Exchanges, Automated Market Making, Blockchain, Decentralized Finance, Market Quality, Limit Order Book |
| JEL: | G14 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2238&r= |
| By: | Pintér, Gábor (Bank of England); Wang, Chaojun (The Wharton School); Zou, Junyuan (INSEAD) |
| Abstract: | Contrary to the prediction of the classic adverse selection theory, a more informed trader could receive better pricing relative to a less informed trader in over‑the‑counter financial markets. Dealers chase informed orders to better position their future quotes and avoid winner’s curse in subsequent trades. When dealers are perfectly competitive and risk averse, their incentive of information chasing dominates their fear of adverse selection. In a more general setting, information chasing can dominate adverse selection when dealers face differentially informed speculators, while adverse selection dominates when dealers face differentially informed trades from a given speculator. These two seemingly contrasting predictions are supported by empirical evidence from the UK government bond market. |
| Keywords: | Information chasing; adverse selection; over-the-counter; price efficiency |
| JEL: | D82 G14 G18 |
| Date: | 2022–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0971&r= |
| By: | Pintér, Gábor (Bank of England); Wang, Chaojun (The Wharton School); Zou, Junyuan (INSEAD) |
| Abstract: | We show that larger trades incur lower trading costs in government bond markets (‘size discount’), but costs increase in trade size after controlling for clients’ identities (‘size penalty’). The size discount is driven by the cross‑client variation of larger traders obtaining better prices, consistent with theories of trading with imperfect competition. The size penalty, driven by the within‑client variation, is larger for corporate bonds, during major macroeconomic surprises and during Covid‑19. These differences are larger among more sophisticated clients, consistent with information‑based theories. The size penalty in US Treasuries is about three times as small as in UK gilts. |
| Keywords: | Trading costs; trade size; government and corporate bonds; trader identities |
| JEL: | G12 G14 G24 |
| Date: | 2022–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0970&r= |