A Theory of Stock Exchange Competition and Innovation: Will the Market Fix the Market?

32 Pages Posted: 22 May 2019 Last revised: 23 Feb 2023

See all articles by Eric B. Budish

Eric B. Budish

University of Chicago - Booth School of Business

Robin S. Lee

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

John J. Shim

University of Notre Dame - Mendoza College of Business

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Date Written: May 2019

Abstract

Will stock exchanges innovate to address latency arbitrage and the arms race for speed? This paper models how exchanges compete in the modern electronic era and how this shapes incentives for market design innovation. In the status quo, exchange trading fees are competitive while exchanges earn economic rents from selling speed. These rents create a wedge between private and social incentives to innovate, and support the persistence of an inefficient market design in equilibrium of a market design adoption game. We discuss implications for policy and insights for the literatures on market design, innovation, and platforms.

Suggested Citation

Budish, Eric B. and Lee, Robin S. and Shim, John J., A Theory of Stock Exchange Competition and Innovation: Will the Market Fix the Market? (May 2019). NBER Working Paper No. w25855, Available at SSRN: https://ssrn.com/abstract=3391008

Eric B. Budish (Contact Author)

University of Chicago - Booth School of Business ( email )

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Robin S. Lee

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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John J. Shim

University of Notre Dame - Mendoza College of Business ( email )

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Notre Dame, IN 46556-0399
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