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Speed, Fragmentation, and Asset Prices

68 Pages Posted: 13 Dec 2012 Last revised: 22 Jun 2014

Emiliano Pagnotta

Imperial College Business School

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2013

Abstract

We study the consequences of trading fragmentation and speed on liquidity and asset prices. Trading venues invest in speed-enhancing technologies and price trading services to attract investors. Investors trade due to preference shocks. We show how the resulting market organization affects asset liquidity and the composition of participating investors. In a consolidated market, speed investments raise liquidity and prices. When markets fragment, liquidity and asset prices can move in opposite directions. We also show how mechanisms that protect execution prices, such as the SEC’s trade-through rule, can decrease price levels and trading volume relative to unregulated markets. Our results suggest that recent regulatory reforms in secondary markets may have unintended negative consequences for public corporations.

The appendices for this paper are available at the following URL:http://ssrn.com/abstract=2204831

Keywords: fragmentation, asset pricing, liquidity, exchanges, investor protection, investor participation, regulation, frictions

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

Suggested Citation

Pagnotta, Emiliano, Speed, Fragmentation, and Asset Prices (December 1, 2013). Available at SSRN: https://ssrn.com/abstract=2188687 or http://dx.doi.org/10.2139/ssrn.2188687

Emiliano Pagnotta (Contact Author)

Imperial College Business School ( email )

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

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