Arms Sales in Financial Markets

48 Pages Posted: 30 Jun 2022 Last revised: 21 Feb 2024

See all articles by Vincent Glode

Vincent Glode

University of Pennsylvania - The Wharton School

Xingtan Zhang

University of Colorado at Boulder - Department of Finance

Date Written: November 16, 2023

Abstract

Many financial transactions are of a fixed-sum nature, meaning that improvements in the terms of trade for one party come at the expense of another party. We model how the sales of trading advantages (e.g., data or co-location services) affect traders' endogenous participation in financial markets and vice-versa. Sellers of trading advantages (e.g., data providers or securities exchanges) maximize profits by charging prices that may lead to inefficiently low levels of market participation and liquidity in equilibrium. Optimal sales of trading advantages lead less sophisticated investors to conclude that financial markets are too ``rigged'' and to exit these markets.

Keywords: Market participation, informational advantage, data sales, collocation, rigged markets, externalities

JEL Classification: G20, G14, D82, D42

Suggested Citation

Glode, Vincent and Zhang, Xingtan, Arms Sales in Financial Markets (November 16, 2023). Available at SSRN: https://ssrn.com/abstract=4146808 or http://dx.doi.org/10.2139/ssrn.4146808

Vincent Glode (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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

Xingtan Zhang

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

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