Competing on Speed

Emiliano Pagnotta and Thomas Philippon ()

No 17652, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Two forces have reshaped global securities markets in the last decade: Exchanges operate at much faster speeds and the trading landscape has become more fragmented. In order to analyze the positive and normative implications of these evolutions, we study a framework that captures (i) exchanges' incentives to invest in faster trading technologies and (ii) investors' trading and participation decisions. Our model predicts that regulation that protect prices will lead to fragmentation and faster trading speed. Asset prices decrease when there is intermediation competition and are further depressed by price protection. Endogenizing speed can also change the slope of asset demand curves. On normative side, we find that for a given number of exchanges, faster trading is in general socially desirable. Similarly, for a given trading speed, competition among exchange increases participation and welfare. However, when speed is endogenous, competition between exchanges is not necessarily desirable. In particular, speed can be inefficiently high. Our model sheds light on important features of the experience of European and U.S. markets since the implementation of Reg. NMS, and provides some guidance for optimal regulations.

JEL-codes: G12 L13 L15 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-com and nep-reg
Note: AP CF IO
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Published as Emiliano S. Pagnotta & Thomas Philippon, 2018. "Competing on Speed," Econometrica, Econometric Society, vol. 86(3), pages 1067-1115, May.

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Working Paper: Competing on Speed (2012)
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