Essays on the Market Microstructure of Centralised and Decentralised Finance
Creators: name: Galati, Luca
Publisher: name: University of Wollongong
Year: 2025
Subjects: classificationCode: 380107
subject: Financial economics

description: This dissertation consists of three essays that examine trading costs and risks across two different market structures–centralised and decentralised finance–and the relationship between the two. The research provides empirical evidence on issues of increasing relevance for the trading of complex financial instruments such as derivatives and crypto-assets. Each essay addresses previously inconclusive research, offering insights for researchers, practitioners, and regulators to manage the costs and risks associated with trading in centralised and decentralised markets.The first essay examines the cost of trading large trades by reporting delays in centralised markets. Prior research left a significant gap in understanding the impact of delaying the information about large trades at the time they are reported. I contribute to both the theoretical framework and empirical literature by using a cleaner natural experiment in FTSE100 futures. The major finding is that reporting delays encourages informed trading and potentially increases information efficiency. This provides practical insights to regulators by suggesting a better market design for their exchanges and market participants, who are affected by the ability of informed traders to observe and anticipate price information in the block trading process.The second essay examines the cost of zero-fee trading in decentralised markets. There is a scarcity of empirical research on this issue, and I provide evidence contrasting prior theoretical studies. By using a cleaner natural experiment in Bitcoin spot pairs traded on Binance, I find evidence that such fees’ elimination encourages market makers to request higher premiums and discounts on limit orders, which in turn widens the bid-ask spread and, therefore, deteriorates liquidity. Notably, despite the removal of trading fees, total transaction costs increased for customers. This and the boost in the exchange market share raise concerns about price integrity and investors’ protection in the highly unregulated crypto environment. The study has significant implications for trading execution, risk management, and investment decision-making in crypto-asset markets and, therefore, should be relevant to regulators and policymakers interested in developing new Regulatory Technology (RegTech) solutions with computerised surveillance.The last essay examines trading risks in the relationship between centralised and decentralised finance. Specifically, it examines the extent to which the collapse of a traditional financial institution, a commercial bank holding investments in tokens, spreads microstructure contagion across digital markets. Prior literature finds no evidence of a meaningful impact the Silicon Valley Bank bankruptcy had on major financial markets and sectors. By applying a BEKK multivariate GARCH model to intraday data, I provide empirical evidence of volatility spillover effects across major stablecoins and Bitcoin, a market severely affected by the collapse. This essay links centralised and decentralised finance, showing the ways in which spillovers can occur between what seem to be separate realms of finance. The results of this research are, therefore, relevant to policymakers in both traditional and modern financial systems who are interested in avoiding the risk of financial contagion, as well as investors willing to defend their savings and balance their portfolios against market uncertainty.