Dynamic Trading in Decentralized Markets


Most financial assets are traded in multiple trading venues. We study a model of imperfectly-competitive trading where agents have multiple opportunities to trade risky assets. We consider decentralized markets: that is, there are coexisting exchanges for many assets and any number of strategic traders. We characterize equilibrium dynamics of prices, trades, and price impact. Markets with the same prices, allocations, and price impact may differ in their dynamic efficiency properties depending on the characteristics of traders and their participation in different exchanges. We provide necessary and sufficient conditions - on trader participation alone - for markets to be dynamically efficient as the number of rounds grows to infinity. Decentralized markets for a single asset (or, more generally, standardized assets) are always dynamically efficient. For assets traded at low frequencies, even markets that are not dynamically efficient can give rise to higher total welfare than the centralized market. Increasing trading frequency can lower welfare due to the interaction of price impact and market incompleteness (i.e., limited participation in the exchanges).