Reference

Emiliano Pagnotta (New York University Stern), “Competing on Speed ”, Fédération des Banques Françaises Seminar, TSE, November 26, 2012, 12:30–14:00, room MF 323.

Abstract

Speed and fragmentation have reshaped global securities markets: Large-cap U.S. stocks can now be traded in almost 50 venues, and execution times are measured in milliseconds. We analyze these evolutions in a model where exchanges invest in trading speed and compete for investors who choose where and how much to trade. Faster venues charge higher fees and attract speed-sensitive investors. Competition among exchanges increases investor participation, traded volumes, and allocative efficiency but can lead to socially excessive levels of speed. Regulations that protect investors (e.g. SEC's trade-through) lead to more fragmentation and faster speeds, but may reduce welfare. Independently of technology and entry costs, the optimal design has a single operating exchange. Our model sheds light on the experience of European and U.S. markets since the implementation of MiFID and Reg NMS.

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