Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/262703 
Year of Publication: 
2020
Series/Report no.: 
Working Paper No. 301
Publisher: 
University of Chicago Booth School of Business, Stigler Center for the Study of the Economy and the State, Chicago, IL
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.
Subjects: 
market design
innovation
financial exchanges
industrial organization
platform markets
high-frequency trading
Document Type: 
Working Paper

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