Automated Market Making and Arbitrage Profits in the Presence of Fees

• DOI: 10.48550/arxiv.2305.14604
• Publication Date: 2023-01-01
• Authors: Jason Milionis; Ciamac C. Moallemi; Tim Roughgarden
• Keywords: Fixed income arbitrage; Index arbitrage; Statistical arbitrage; Covered interest arbitrage

We consider the impact of trading fees on profits arbitrageurs against an automated marker (AMM) or, equivalently, adverse selection incurred by liquidity providers due to arbitrage. extend model Milionis et al. [2022] for a general class two asset AMMs both introduce and discrete Poisson block generation times. In our setting, we are able compute expected instantaneous rate arbitrage profit in closed form. When low, fast asymptotic regime, takes particularly simple form: simply scale down fraction time that arriving arbitrageur finds profitable trade.