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 ShimJournal 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
[PDF]Slides
Slides, Will the Market Fix the Market?
[PDF]
AEA Presentation (Jan 2022)
[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 Talks
Transcript, Will the Market Fix the Market?
AEA / AFA Joint Luncheon Talk, January 6, 2017, Chicago.Video
AEA/AFA Joint Luncheon Address, Will the Market Fix the Market?
AEA / AFA Joint Luncheon Talk, Chicago, January 6, 2017.Policy Discussion
SEC Feb. 2020 Proposal re: Market Data Infrastructure
Market Data Infrastructure, Proposed Rule, Securities and Exchange Commission, 2020. [PDF]
