Intermediation and Price Volatility

Thomas Gehrig and Klaus Ritzberger

No 15848, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper analyses the role of intermediaries in providing immediacy in fast markets. Fast markets are modelled as contests with the possibility of multiple winners where the probability of casting the best quote depends on prior technology investments. Depending on the market design, equilibrium pricing by intermediaries involves a trade-off, between monopolistic price distortion and excess volatility. Since equilibrium at the pricing stage generates an externality, investments into faster trading technologies are necessarily asymmetric in equilibrium, akin to markets with vertical product differentiation. Further, equilibrium is not necessarily effcient, since it is possible that a high-cost intermediary ends up investing excessively and thus trades more frequently than low-cost rivals.

Keywords: High-frequency trading; Intermediation; Market design; Price volatility (search for similar items in EconPapers)
JEL-codes: D43 D47 G14 L13 (search for similar items in EconPapers)
Date: 2021-02
New Economics Papers: this item is included in nep-com and nep-mst
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Citations: View citations in EconPapers (1)

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