Decentralized-Market Design

University Of Wisconsin-Madison, Madison WI

Investigators

Abstract

This award funds research in economic theory. In today's markets, essentially all financial assets are traded in multiple trading venues that operate in a decentralized way. The recent financial crisis raised questions about the effects of market fragmentation, the impact of new exchanges, and the possibility of excessive financial innovation, calling for new areas of investigation and modeling. This project has two broad objectives. First, it will identify potential sources of efficiency gains associated with decentralized trading. Second, the project will contribute general principles for financial market design as well as support for policy evaluation and methods that would help develop a theory of imperfectly competitive fragmented markets. The research could help achieve greater efficiency and revenue, while meeting important societal objectives for equality and incentives. The results could also be useful for antitrust regulators and for policy makers and others who seek to evaluate financial regulations. Improvements in the efficiency and effectiveness of financial markets help to create economic prosperity. This research introduces a flexible framework for the equilibrium analysis of imperfectly competitive financial markets. To the growing literature on decentralized trading, which has explored over-the-counter (bilateral) transactions, this research contributes methods for equilibrium analysis of general market structures with multiple coexisting exchanges and flexible contracts. The research team will examine three classes of instruments that would be redundant if trading were either competitive or centralized: (1) the creation of new trading venues for existing assets and exchange design, (2) the introduction of new assets, and (3) innovation in the types of market clearing that decentralized trading enables. The results will demonstrate the greater potential of market design to increase efficiency relative to centralized trading. As classical methods for equilibrium analysis, which are based on spanning, do not apply in (imperfectly competitive) decentralized markets, this research will develop an alternative approach. The techniques developed in this project may be used by others to facilitate research on complex networks. Broader impacts include the possible effects on market practice and government policies. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.