Univ.-Prof. Dr. Erik Theissen (Vertragsprofessor)

Experimental Evidence on the Financial Economics of Automated Market Making versus Limit Order Book Markets (joint with Alexander Brauneis, Roland Mestel and Stefan Palan)

Trading of financial instruments traditionally occurs on centralized exchanges (CEXs) operated by third-party intermediaries, facilitating the entire trading process (eg order collection and matching, trade reporting, clearing and settlement) through their operational structure. Recent years have seen innovations in the trading mechanism of financial markets aiming to bypass third-party intermediation and facilitate decentralized trading on so-called decentralized exchanges (DEXs). The most notable innovation is Automated Market Making (AMM), centered around so-called liquidity pools that mimic the central limit order book (CLOB) in traditional financial markets. These liquidity pool are set in a smart contract on the blockchain, handling order submission, price determination, trade execution, and settlement. Although originally designed for trading crypto assets, AMM could be adapted for trading traditional financial assets. However, robust research comparing AMM and CLOB in terms of financial market functions is currently lacking.