WFE Webinar
“The Effect of DLT Settlement Latency on Market Liquidity”
Date:May 30, 2024 Time:14:00-15:00 UTC
Presenters: Pedro Gurrola-Perez, Head of Research, and Kaitao Lin, Senior Financial Economist, The World Federation of Exchanges
Summary: We will present our latest research paper where we investigate the causal relationship between Distributed Ledger Technology (DLT) settlement latency and market quality in the cryptocurrency domain. Utilizing the cryptocurrency market as a unique laboratory, we identify blockchain mining power as an instrumental variable for DLT settlement latency. Our analysis reveals that DLT settlement latency significantly lowers liquidity and increases transaction costs. In addition, through the Huang and Stoll (1997) spread decomposition, we document that DLT settlement latency reduces the adverse selection costs and increases the inventory management costs faced by liquidity suppliers. Moreover, these effects are more pronounced in smaller trading venues and for the native cryptocurrency of the settlement blockchain. More broadly, this paper contributes novel evidence on the importance of settlement, and highlights the balance between decentralized, near-instantaneous settlement cycles offered by DLT and the potential adverse impacts on market quality.
Format: There will be a 30 min conversation followed by an audience Q&A.
This is an open event. Feel free to share with colleagues inside your organisation who may be interested.
Pedro joined the World Federation of Exchanges in October 2019 from the Bank of England, where he led the Financial Market Infrastructures Directorate’s Research Team. He had joined the Bank of England in 2013, after two years at the UK Financial Services Authority. Previously, Pedro spent more than 15 years lecturing and doing research at a range of well-regarded academic institutions, including the University of Barcelona and the Instituto Tecnológico Autónomo de México (ITAM).
Pedro holds two PhDs: one from the University of Barcelona, Spain, and one from the University of Montpellier, France, and has published across key academic journals, including the Journal of Financial Market Infrastructures, the Journal of Risk, International Finance and the Journal of Futures Markets. His recent work includes research on the economics of distributed ledger technologies (DLT) for securities settlement, on the network structure of settlement fails and on market liquidity risk in CCPs. He has also published research on payment systems, back-testing methodologies and on the structure of interest rate futures markets. In 2007 he received the National Award on Derivatives Research, awarded by the Mexican Derivatives Exchange (MexDer).
Kaitao joined the World Federation of Exchanges in May 2020 and currently holds the position of senior financial economist in the Research Team. Kaitao holds a Ph.D. in Finance from the University of Houston and is a Chartered Financial Analyst® (CFA®) charterholder. His research focuses on market microstructure issues, such as trading rules, their effects on market participants, and market quality. His current work includes ESG and crypto assets. Kaitao’s papers have been accepted for publication in well-regarded academic journals, such as the Quarterly Journal of Finance, and presented in various international conferences, including the U.S. SEC Ph.D. Symposium, the China International Conference in Finance, and the Financial Management Association Annual Meeting.
