Market Design in the Digital Age – MIDAS

Technologically-driven innovation in finance (FinTech) is poised to streamline trading, reduce costs, and disrupt the existing financial architecture. I propose a research program to study the impact of FinTech on the financial system and to recommend market design solutions that optimize the implementation of FinTech products and services.

The proposal has two main axes. First, from a pre-trade perspective, high-frequency discrete batch auctions are suggested as an alternative to continuous-time trading. Second, from a post-trade perspective, Blockchain technology implementation in clearing and settlement is expected to allow the instantaneuous transfer of assets and reduce trading costs.

We employ a wide range of scientific methodologies. First, we build several game-theoretical models of financial markets to study the optimal design of batch auctions and of blockchain settlement. Second, we empirically test the impact of Blockchain settlement on financial markets through a series of event studies on the Australia Stock Exchange, Moscow Stock Exchange, and the Swiss-based FOREX platform Lykke. Third, we build a comprehensive laboratory experiment at Université Paris-Dauphine to study the link between trading speed and arbitrageur competition on discrete-time markets.

Our research ultimately aims to offer practical solutions to relevant concerns of the market supervision authorities and exchanges alike. We address several concrete questions, such as: Should trading platforms abandon continuous-time trading in favor of discrete-time trading? Should exchanges embrace Blockchain settlement and, if so, should they opt for a public or a private ledger? How can markets and regulators employ the flexiblity of nascent technologies to improve liquidity, reduce risks, and better allocate resources in the economy?