Competing on speed

• Main Authors: PAGNOTTA, Emiliano Sebastian, PHILIPPON, Thomas
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2018
• Subjects: Trading speed; exchanges; liquidity; fragmentation; segmentation; vertical differentiation; search; high-frequency trading; regulation; trade-through rule; investor participation; entry; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/7028; https://ink.library.smu.edu.sg/context/lkcsb_research/article/8027/viewcontent/2018_Pagnotta_Competing_on_Speed_pv.pdf
• Institution: Singapore Management University

We analyze trading speed and fragmentation in asset markets. In our model, trading venues make technological investments and compete for investors who choose where and how much to trade. Faster venues charge higher fees and attract speed-sensitive investors. Competition among venues increases investor participation, trading volume, and allocative efficiency, but entry and fragmentation can be excessive, and speeds are generically inefficient. Regulations that protect transaction prices (e.g., Securities and Exchange Commission trade-through rule) lead to greater fragmentation. Our model sheds light on the experience of European and U.S. markets since the implementation of Markets in Financial Instruments Directive and Regulation National Markets System.