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Competing on Speed

Author

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  • Emiliano S. Pagnotta
  • Thomas Philippon

Abstract

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.

Suggested Citation

  • Emiliano S. Pagnotta & Thomas Philippon, 2018. "Competing on Speed," Econometrica, Econometric Society, vol. 86(3), pages 1067-1115, May.
    • Handle: RePEc:wly:emetrp:v:86:y:2018:i:3:p:1067-1115
    DOI: 10.3982/ECTA10762
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    References listed on IDEAS

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    1. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
    2. Thierry Foucault & Christine A. Parlour, 2004. "Competition for Listings," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 329-355, Summer.
    3. Glosten, Lawrence R, 1994. "Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, vol. 49(4), pages 1127-1161, September.
    4. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-1483, September.
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    Citations

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    Cited by:

    1. Vasilios Mavroudis, 2019. "Market Manipulation as a Security Problem," Papers 1903.12458, arXiv.org.
    2. Yacine Aït-Sahalia & Mehmet Saglam, 2013. "High Frequency Traders: Taking Advantage of Speed," NBER Working Papers 19531, National Bureau of Economic Research, Inc.
    3. William Fuchs & Andrzej Skrzypacz, 2019. "Costs and benefits of dynamic trading in a lemons market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 105-127, July.
    4. Michael Goldstein & James J. Angel, 2014. "When Finance Meets Physics: The Impact of the Speed of Light on Financial Markets and Their Regulation," The Financial Review, Eastern Finance Association, vol. 49(2), pages 271-281, May.
    5. Dugast, J., 2013. "Limited attention and news arrival in limit order markets," Working papers 449, Banque de France.
    6. David A. Cimon, 2016. "Broker Routing Decisions in Limit Order Markets," Staff Working Papers 16-50, Bank of Canada.
    7. Trejos, Alberto & Wright, Randall, 2016. "Search-based models of money and finance: An integrated approach," Journal of Economic Theory, Elsevier, vol. 164(C), pages 10-31.
    8. Andrew G. Atkeson & Andrea L. Eisfeldt & Pierre‐Olivier Weill, 2015. "Entry and Exit in OTC Derivatives Markets," Econometrica, Econometric Society, vol. 83, pages 2231-2292, November.
    9. Hoffmann, Peter, 2014. "A dynamic limit order market with fast and slow traders," Journal of Financial Economics, Elsevier, vol. 113(1), pages 156-169.
    10. Rocheteau, Guillaume & Rodriguez-Lopez, Antonio, 2014. "Liquidity provision, interest rates, and unemployment," Journal of Monetary Economics, Elsevier, vol. 65(C), pages 80-101.
    11. Cécile Bastidon, 2017. "Stock markets fragmentation, volatility and final investors," Annals of Finance, Springer, vol. 13(4), pages 435-451, November.

    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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