Why Do Stock Exchanges Compete on Speed, and How?

64 Pages Posted: 11 Nov 2017 Last revised: 25 Oct 2021

See all articles by Xin Wang

Xin Wang

Nanyang Technological University (NTU) - Division of Banking & Finance

Date Written: October 1, 2021


This paper shows that a key driver of stock exchanges' competition on order-processing speeds is the Order Protection Rule, which requires an exchange to route its customers' orders to other exchanges with better prices. Faster exchanges attract more price-improving limit orders because the probability of being bypassed by trades with inferior prices on other exchanges is reduced. When all exchanges speed up, the bypassing probability can increase, potentially harming the welfare of investors. In contrast, increasing connection speeds between exchanges raise investor welfare by reducing the bypassing probability. Nevertheless, no exchange wants to improve connection speeds because this will reduce its trading volume. I provide empirical evidence supporting these predictions. Overall, my findings suggest that exchanges do not necessarily compete on liquidity-enhancing dimensions.

Keywords: Exchange Speed, High-frequency Trading, Trade-through, Order Delay

JEL Classification: D47, G10, G14, G18

Suggested Citation

Wang, Xin, Why Do Stock Exchanges Compete on Speed, and How? (October 1, 2021). Available at SSRN: https://ssrn.com/abstract=3069529 or http://dx.doi.org/10.2139/ssrn.3069529

Xin Wang (Contact Author)

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

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