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Title: Liquidity and price informativeness in blockchain-based markets Authors:  Stefan Voigt - University of Copenhagen (Denmark) [presenting]
Abstract: Blockchain-based markets impose substantial costs on cross-market trading due to the decentralized and time-consuming settlement process. We quantify the impact of the time-consuming settlement process in the market for Bitcoin on arbitrageurs activity. The estimation rests on a novel threshold error correction model that exploits the notion that arbitrageurs suspend trading activity when arbitrage costs exceed price differences. We estimate substantial arbitrage costs that explain 6\% of the observed price differences, where more than 75\% of these costs can be attributed to the settlement process. We also find that a 10 bp decrease in latency-related arbitrage costs simultaneously results in a 3 bp increase of the quoted bid-ask spreads. We reconcile this finding in a theoretical model in which liquidity providers set larger spreads to cope with high adverse selection risks imposed by increased arbitrage activity. Consequently, efforts to reduce the latency of blockchain-based settlement might have unintended consequences for liquidity provision. In markets with substantial adverse selection risk, faster settlement may even harm price informativeness.