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