Speed, Fragmentation, and Asset Prices

68 Pages Posted: 13 Dec 2012 Last revised: 14 Nov 2020

Multiple version iconThere are 2 versions of this paper

Date Written: January 31, 2018

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 (January 31, 2018). Available at SSRN: https://ssrn.com/abstract=2188687 or http://dx.doi.org/10.2139/ssrn.2188687

Emiliano Pagnotta (Contact Author)

Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore, 178899
Singapore

HOME PAGE: http://www.emilianopagnotta.com

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