2023/07/25 by Alfred Lehar, Lehar, Alfred, Christine A. Parlour +3 · 1 citation
Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #Economic theories and models #FOS: Economics and business #Financial Markets and Investment Strategies #Trading and Market Microstructure (q-fin.TR)
paper · pdf · doi:10.48550/arxiv.2307.13772
openalex publication_date 2023/07/25 · openalex created_date 2023/07/28 · openalex updated_date 2026/07/28
We investigate how liquidity providers (LPs) choose between high- and low-fee trading venues, in the face of a fixed common gas cost. Analyzing Uniswap data, we find that high-fee pools attract 58% of liquidity supply yet execute only 21% of volume. Large LPs dominate low-fee pools, frequently adjusting out-of-range positions in response to informed order flow. In contrast, small LPs converge to high-fee pools, accepting lower execution probabilities to mitigate adverse selection and liquidity management costs. Fragmented liquidity dominates a single-fee market, as it encourages more liquidity providers to enter the market, while fostering LP competition on the low-fee pool.