Information Diffusion and Speed Competition

66 Pages Posted: 5 Sep 2018 Last revised: 13 Sep 2021

See all articles by Xuezhong He

Xuezhong He

Xi'an Jiaotong-Liverpool University (XJTLU)

Junqing Kang

Sun Yat-sen University (SYSU) - Lingnan (University) College

Date Written: September 13, 2021

Abstract

Do faster information diffusion and informed trading improve price discovery? Based on Hong and Stein (1999), we develop a two-period endogenous equilibrium model of speed acquisition where traders receive heterogeneous information from a diffusion process. While faster information diffusion makes slow traders more informed, it also intensifies competition as the same information is observed by more traders. When there is sufficiently large fraction of slow traders, the competition effect dominates, which increases a first-mover advantage to fast traders. Hence faster information dissemination can “crowd in” fast trading and improve price discovery in both periods, although more investors rush to trade quickly with less precise information. However, with fully informed traders participating in the market at late trading round, faster information dissemination reduces information rent. Due to the complementarity of speed acquisition to information production, this further “crowds out” fast traders and therefore reduces price discovery.

Keywords: Information diffusion, speed competition, strategic trading, endogenous information and speed, complementarity, market quality

JEL Classification: G12, G14, G18, D41, D44, D47, D82, D83, D84

Suggested Citation

He, Xue-Zhong 'Tony' and Kang, Junqing, Information Diffusion and Speed Competition (September 13, 2021). 2019 Financial Markets & Corporate Governance Conference, Available at SSRN: https://ssrn.com/abstract=3239821 or http://dx.doi.org/10.2139/ssrn.3239821

Xue-Zhong 'Tony' He (Contact Author)

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
Suzhou, JiangSu province 215123
China

Junqing Kang

Sun Yat-sen University (SYSU) - Lingnan (University) College ( email )

135 Xingang Xi Road
Guangzhou, Guangzhou 510275
China

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