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Price Efficiency in Markets with Stochastic Latency
1 : Vienna Graduate School of Finance
(VGSF)
-
Website
WU (Vienna University of Economics and Business) Department of Finance, Accounting and Statistics Welthandelsplatz 1 -
Austria
2 : University of Vienna [Vienna]
Universitätsring 1, 1010 Wien -
Austria
We analyze how stochastic latency in the transaction settlement process, as introduced by distributed ledger systems, affects price efficiency. The time-consuming nature of the settlement process exposes arbitrageurs to price risk and imposes limits to arbitrage. We derive a measure for the boundaries imposed by the stochastic latency to quantify aggregate market-wide efficiency. We then apply our measure to the Bitcoin market and collect high-frequency orderbook snapshots for 18 cryptocurrency exchanges accounting for roughly 95 % of global bitcoin trading volume. We find that even under conservative assumptions, more than 37 % of observed price differences can be attributed to stochastic latency.
