Essays in market microstructure

In the first chapter, we investigate the hidden costs associated with Guaranteed Volume-Weighted Average Price (G-VWAP) contracts. Using a continuous-time mean–variance model incorporating both permanent and temporary price impacts, we demonstrate that brokers offering guaranteed execution at seemingly attractive terms exploit their market power through strategic timing of trades. Higher permanent price impact encourages brokers to front-load trades, thereby increasing execution prices and embedding hidden costs within the VWAP benchmark. In contrast, increased temporary impact flattens the broker’s trading path, discouraging rapid trades. In the second chapter, we study the implications of inverted exchanges on liquidity provision, particularly in the presence of high-frequency traders. Inverted exchanges mitigate inefficiencies arising from tick-size constraints by enabling a finer grid. Inverted venues solve the mismatch between an HFT’s price priority and a liquidity demander’s time priority. The model yields testable predictions on HFT activity and relative exchange trading volumes, which we confirm using high-frequency data. In the third chapter (co-authored with Emre Ozdenoren, Jiahua Xu and Kathy Yuan), we examine dominant currencies in Decentralized Finance. Using data collected from Uniswap, we analyze the swapping routes between currency pairs. In line with the dominant currency paradigm, we find that safety is a leading dominance attribute during bust periods, while liquidity is more important during booms. We also find that an active money market, market size, and a currency’s correlation with transaction costs are important determinants for dominance, suggesting essential design choices for future Central Bank Digital Currencies.