Arms Sales in Financial Markets

45 Pages Posted: 30 Jun 2022 Last revised: 3 Aug 2022

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: August 2, 2022

Abstract

Many financial transactions are of a fixed-sum nature, meaning that any improvement in the terms of trade for one party comes at the expense of another party. We model how the sales of trading advantages (e.g., data or collocation services) affect traders' endogenous participation in a market and vice-versa. We show how the magnitude of the externality that a trading advantage imposes on counterparties impacts financial market conditions. In equilibrium, the optimal sales of trading advantages by a monopolist (e.g., data provider or a securities exchange) may result in inefficiently low levels of market participation and trade.

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 (August 2, 2022). 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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