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

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

Coauthors: Robin Lee and John Shim
Journal of Political Economy, (2024): 132, no. 4, 1209-1246. [PDF]

Abstract

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.

Appendices

Appendix, Theory of Stock Exchange

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Policy Discussion

SEC Feb. 2020 Proposal re: Market Data Infrastructure

Market Data Infrastructure, Proposed Rule, Securities and Exchange Commission, 2020. [PDF]

SEC Commissioner Jackson

Statement on Reforming Stock Exchange Governance, Public Statement, Commissioner Robert J. Jackson Jr., 2020.. [PDF]

Press Coverage

The Trades Are Free, the Data Will Cost You

Matt Levine, Matt Levine, May 21, 2019 [PDF]

SEC Commissioner Calls for Regulators to Bolster Market Oversight

Wall Street Journal, Gretchen Morgenson, Sep 18, 2018 [PDF]

Public Talk

Transcript, Will the Market Fix the Market?

AEA / AFA Joint Luncheon Talk, January 6, 2017, Chicago.

Slides

Slides, Will the Market Fix the Market?

[PDF]

AEA Presentation (Jan 2022)

[PDF]

Video

AEA/AFA Joint Luncheon Address, Will the Market Fix the Market?

AEA / AFA Joint Luncheon Talk, Chicago, January 6, 2017.