This seminar is part of the SAFE Brown Bag Seminar Series, a seminar series for researchers affiliated with SAFE. Organized by the Leibniz Institute SAFE, the series provides an informal platform for presenting and discussing ongoing research and regularly features invited external speakers. The meeting takes place in the SAFE Common Room on Wednesday, 2-3 pm.
Speaker: Katja Malinova (McMaster University)
Katya will present a paper titled “Dethroning the Dollar? Multi-Currency Automated Market Making for FX” joint with Andreas Park (University of Toronto).
Abstract:
Most foreign exchange transactions route through the US dollar, even when neither counterparty needs dollars. This so-called vehicle-currency arrangement concentrates volume and lowers costs on major pairs but forces cross-pair traders to pay two spreads - an implicit cross-subsidy. We ask whether multi-currency automated market makers can do better. Using a constant-product framework with competitive liquidity provision, we derive closed-form conditions under which a multilateral pool dominates bilateral trading and vehicle routing. The key mechanism is capital multiplexing: deposits backing major pairs simultaneously provide depth on cross pairs. We show that vehicle routing can be aggregate-welfare-superior even when cross-pair traders individually bear disproportionate costs, but that the multilateral pool resolves this tension over a wide parameter range. Extending to n currencies, the multilateral advantage grows whenever pairwise correlation exceeds a closed-form threshold. Calibrated to 146 currencies, the multilateral pool reduces trading costs by 30-60% relative to vehicle routing for the vast majority of pairs.
If you have questions, feel free to contact Alessandro Gastaldello.
