Competing on Speed / Emiliano Pagnotta, Thomas Philippon.

Format:

Book

Author/Creator:

Pagnotta, Emiliano.

Contributor:

National Bureau of Economic Research.

Philippon, Thomas.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17652.

NBER working paper series no. w17652

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

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.

Notes:

Print version record

December 2011.