The Privacy Subsidy in Market Microstructure

Battle Count: 67

Highly relevant for quantitative trading in privacy-preserving venues. The paper directly addresses market-making economics under privacy constraints, provides closed-form fee calibration for shielded exchanges, establishes the LVR correspondence for AMM solvency, and quantifies the welfare cost of privacy noise. The BTC/USDT calibration (1.6-173 bps break-even fees across privacy levels) is directly actionable for exchange operators. The impossibility theorem has implications for any algorithmic execution strategy operating on coarsened order-flow signals. However, it is primarily a theoretical/welfare paper rather than a strategy-development paper.

The theoretical framework is mathematically sophisticated (impossibility theorem via tower property, HJB/Riccati for continuous-time Kyle-Back, mechanism design with DP calibration). Implementing the closed-form subsidy formulas and break-even fee calculations is straightforward given the explicit expressions. However, implementing a full privacy-preserving exchange that instantiates the signal-versus-settlement gap requires significant cryptographic infrastructure (MPC, shielded pools, DP noise injection). The numerical calibration and comparative statics are directly implementable from the closed forms provided.

The paper provides complete proofs in Appendix A, symbolic algebra scripts (Sympy) verifying closed-form equilibria, impossibility wedge, and fee/mechanism results are available from the author on request. All key results are derived analytically with explicit closed forms. A numerical illustration with BTC/USDT calibration is provided in Section B. However, no public repository is linked, and the scripts are only available on request.