A Theory of Stock Exchange Competition and Innovation: Will the Market Fix the Market?

Eric Budish, Robin Lee and John J. Shim

No 25855, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Will stock exchanges innovate to address latency arbitrage and the arms race for speed? This paper models how exchanges compete in the modern electronic era and how this shapes incentives for market design innovation. In the status quo, exchange trading fees are competitive while exchanges earn economic rents from selling speed. These rents create a wedge between private and social incentives to innovate, and support the persistence of an inefficient market design in equilibrium of a market design adoption game. We discuss implications for policy and insights for the literatures on market design, innovation, and platforms.

JEL-codes: D02 D44 D47 D53 D82 G1 G2 G23 L1 L13 L5 L89 (search for similar items in EconPapers)
Date: 2019-05
New Economics Papers: this item is included in nep-des, nep-fmk and nep-mst
Note: AP CF IO LE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published as Eric Budish & Robin S. Lee & John J. Shim, 2024. "A Theory of Stock Exchange Competition and Innovation: Will the Market Fix the Market?," Journal of Political Economy, vol 132(4), pages 1209-1246.

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