Impact of Volatility on Time-Based Transaction Ordering Policies

TL;DR

This paper analyzes how volatility impacts the effectiveness of time-based transaction ordering policies, specifically in the context of Arbitrum's ELA, revealing that risk aversion and volatility forecasting challenges influence bidders' valuation of priority access.

Contribution

It introduces a model linking volatility and risk aversion to transaction priority valuation and empirically tests it using real auction data and high-frequency ETH prices.

Findings

Valuation of priority access is discounted by risk aversion.

Volatility forecasting difficulty affects bidders' bidding behavior.

Empirical data supports the model's predictions.

Abstract

We study Arbitrum's Express Lane Auction (ELA), an ahead-of-time second-price auction that grants the winner an exclusive latency advantage for one minute. Building on a single-round model with risk-averse bidders, we propose a hypothesis that the value of priority access is discounted relative to risk-neutral valuation due to the difficulty of forecasting short-horizon volatility and bidders' risk aversion. We test these predictions using ELA bid records matched to high-frequency ETH prices and find that the result is consistent with the model.