AbstractMost assets are traded in multiple interconnected trading venues. This paper develops an equilibrium model of decentralized markets that accommodates general market structures with coexisting exchanges. Decentralized markets can allocate risk among traders with different risk preferences more efficiently, thus realizing gains from trade that cannot be reproduced in centralized markets. Market decentralization always increases price impact. Yet, markets in which assets are traded in multiple exchanges, whether they are disjoint or intermediated, can give higher welfare than the centralized market with the same traders and assets. In decentralized markets, demand substitutability across assets is endogenous and heterogeneous among traders.
CitationMalamud, Semyon, and Marzena Rostek. 2017. "Decentralized Exchange." American Economic Review, 107 (11): 3320-62. DOI: 10.1257/aer.20140759
- D43 Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
- D44 Auctions
- D85 Network Formation and Analysis: Theory
- G11 Portfolio Choice; Investment Decisions
- G12 Asset Pricing; Trading Volume; Bond Interest Rates