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Competing on Speed

74 Pages Posted: 15 Dec 2011  

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: January 2012

Abstract

Two forces have reshaped global securities markets in the last decade: Exchanges operate at much faster speeds and the trading landscape has become more fragmented. In order to analyze the positive and normative implications of these evolutions, we study a framework that captures (i) exchanges’ incentives to invest in faster trading technologies and (ii) investors’ trading and participation decisions. Our model predicts that regulations that protect prices will lead to fragmentation and faster trading speed. Asset prices decrease when there is intermediation competition and are further depressed by price protection. Endogenizing speed can also change the slope of asset demand curves. On normative side, we find that for a given number of exchanges, faster trading is in general socially desirable. Similarly, for a given trading speed, competition among exchange increases participation and welfare. However, when speed is endogenous, competition between exchanges is not necessarily desirable. In particular, speed can be inefficiently high. Our model sheds light on important features of the experience of European and U.S. markets since the implementation of MiFID and Reg. NMS, and provides some guidance for optimal regulations.

Suggested Citation

Pagnotta, Emiliano and Philippon, Thomas, Competing on Speed (January 2012). NYU Working Paper No. 2451/31437. Available at SSRN: https://ssrn.com/abstract=1972807

Emiliano Pagnotta

Imperial College Business School ( email )

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

Thomas Philippon (Contact Author)

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

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