Download this Paper Open PDF in Browser

Competing on Speed

59 Pages Posted: 2 Dec 2011 Last revised: 31 Oct 2017

Emiliano Pagnotta

Imperial College Business School

Thomas Philippon

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: October 29, 2017

Abstract

We analyze trading speed and fragmentation in asset markets. In our model, trading venues make technological investments 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, trading volume, and allocative efficiency, but entry and fragmentation can be excessive, and speeds are generically inefficient. Regulations that protect transaction prices (e.g., Securities and Exchange Commission trade-through rule) lead to greater fragmentation. Our model sheds light on the experience of European and U.S. markets since the implementation of Markets in Financial Instruments Directive and Regulation National Markets System.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2047536

Keywords: liquidity, fragmentation, trading, exchanges, asset pricing, financial markets, high frequency trading, regulation, search, welfare

JEL Classification: G12, G15, G18, D40, D43, D61

Suggested Citation

Pagnotta, Emiliano and Philippon, Thomas, Competing on Speed (October 29, 2017). Available at SSRN: https://ssrn.com/abstract=1967156 or http://dx.doi.org/10.2139/ssrn.1967156

Emiliano Pagnotta (Contact Author)

Imperial College Business School ( email )

Imperial College Business School, Tanaka Building
London, SW7 2AZ
Great Britain
+447478734028 (Phone)

Thomas Philippon

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paper statistics

Downloads
970
Rank
15,027
Abstract Views
4,045