Do Stock Exchanges Specialize? Evidence from the New Jersey Transaction Tax Proposal
40 Pages Posted: 11 Oct 2021 Last revised: 23 Mar 2022
Date Written: October 4, 2021
Exchange ownership in the U.S. is often characterized as excessively concentrated. This leads to a concern that such concentration may prevent peripheral exchanges from mitigating adverse selection costs associated with low-latency arbitrage. We examine this concern using low-latency connectivity disruptions caused by recent temporary relocations of two markets, NYSE Chicago and Nasdaq PSX, in response to a transaction bill proposal. Although both exchanges had previously announced measures to curb low-latency trading, the connectivity disruptions cause a substantial reduction in adverse selection. These results suggest that peripheral markets have little incentive to implement measures restricting low-latency arbitrage.
Keywords: Peripheral Markets, Adverse Selection, Liquidity, Connectivity
JEL Classification: G10, G14
Suggested Citation: Suggested Citation