A Theory of Stock Exchange Competition and Innovation: Will the Market Fix the Market? /
Budish, Eric.
A Theory of Stock Exchange Competition and Innovation: Will the Market Fix the Market? / Eric Budish, Robin S. Lee, John J. Shim. - Cambridge, Mass. National Bureau of Economic Research 2019. - 1 online resource: illustrations (black and white); - NBER working paper series no. w25855 . - Working Paper Series (National Bureau of Economic Research) no. w25855. .
May 2019.
This paper builds a new model of financial exchange competition, tailored to the institutional details of the modern US stock market. In equilibrium, exchange trading fees are competitive but exchanges are able to earn economic profits from the sale of speed technology. We document stylized facts consistent with these results. We then use the model to analyze incentives for market design innovation. The novel tension between private and social innovation incentives is incumbents' rents from speed technology in the status quo. This creates a disincentive to adopt new market designs that eliminate latency arbitrage and the high-frequency trading arms race.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.
A Theory of Stock Exchange Competition and Innovation: Will the Market Fix the Market? / Eric Budish, Robin S. Lee, John J. Shim. - Cambridge, Mass. National Bureau of Economic Research 2019. - 1 online resource: illustrations (black and white); - NBER working paper series no. w25855 . - Working Paper Series (National Bureau of Economic Research) no. w25855. .
May 2019.
This paper builds a new model of financial exchange competition, tailored to the institutional details of the modern US stock market. In equilibrium, exchange trading fees are competitive but exchanges are able to earn economic profits from the sale of speed technology. We document stylized facts consistent with these results. We then use the model to analyze incentives for market design innovation. The novel tension between private and social innovation incentives is incumbents' rents from speed technology in the status quo. This creates a disincentive to adopt new market designs that eliminate latency arbitrage and the high-frequency trading arms race.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.