Competing on Speed
New York University (NYU)- Stern School of Business Dept. of Finance
New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)
Technologies that accelerate transaction speed have reshaped securities, FX, and derivatives markets. The trading landscape has become more fragmented. We analyze these evolutions in a model where trading venues invest in speed technologies and compete for investors who choose where and how much to trade. Faster venues charge higher fees and attract speed-sensitive investors. Competition among venues increases investor participation, volumes, and al- locative efficiency but can lead to socially excessive levels of speed. Regulations that protect transaction prices (e.g. SEC’s trade-through) lead to more frag- mentation and faster speeds, but may reduce welfare. Independently of tech- nology and entry costs, the optimal design has a single operating venue. Our model sheds light on the experience of European and U.S. markets since the implementation of MiFID and Reg NMS.
The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2047536
Number of Pages in PDF File: 45
Keywords: liquidity, fragmentation, trading, exchanges, asset pricing, financial markets, high frequency trading, regulation, search, welfare
JEL Classification: G12, G15, G18, D40, D43, D61working papers series
Date posted: December 2, 2011 ; Last revised: November 26, 2013
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 0.344 seconds