Decentralized Exchange∗†
Semyon Malamud
Marzena Rostek
EPF Lausanne
Swiss Finance Institute and CEPR
University of Wisconsin-Madison
Department of Economics
February 11, 2016
Most 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. There are gains to trade in decentralized markets that have no centralizedmarket counterparts. 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. Changes in market structure that lower liquidity may increase the
utility of every agent. In decentralized markets, demand substitutability is endogenous and
heterogeneous across traders.
JEL Classification: D43, D85, C72, G11, G12; Keywords: Decentralized Markets, Trading Networks, Over the Counter, Games on Networks, Hypergraphs, Double Auction, Price Impact, Welfare
∗
We would like to thank Ana Babus, Alberto Bisin, Bruce Carlin, Darrell Duffie, Matt Elliott, Mikhail
Golosov, Sanjeev Goyal, Piero Gottardi, Christopher Henessy, Peter Kondor, Guido Lorenzoni, Anna Pavlova,
Mark Ready, Yuliy Sannikov, Fernando Vega-Redondo, Rakesh Vohra, Nathan Yoder, Ji Hee Yoon; the participants at the 2013 AEA meetings (San Diego), the 9th Annual Cowles Conference on General Equilibrium
and Applications (Yale), the Economic Networks and Banking Conference (LSE, 2013), SAET Conference
(2013), SITE (2013), CEPR Asset Pricing Meeting (Gerzensee, 2013), Financial and Economic Networks
Conference (2013, Wisconsin School of Business), Cambridge-INET Workshop (2014); and seminar participants at the Bank of Canada, Berkeley, Boston College, Caltech, Carnegie Mellon/Pittsburgh, Collegio Carlo
Alberto, Duke, EUI, Imperial College London, Iowa, Kellogg, LBS, Minnesota, MIT Sloan, Penn, Penn State,
Purdue, UCL, UCLA, and Yale for their comments and suggestions. The authors gratefully acknowledge the
financial support of this research by the NET Institute. Rostek acknowledges the financial support of the NSF
through Grant SES-1357758. Malamud acknowledges the financial support of the Swiss Finance Institute and
the Swiss National Science Foundation. E-mails: semyon.malamud@epfl.ch, mrostek@ssc.wisc.edu.
†
A copy of the paper is available by e-mail.
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