NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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John Shim

Booth School of Business
University of Chicago
5807 S Woodlawn Avenue
Chicago, IL 60637

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: University of Chicago

NBER Working Papers and Publications

May 2019Will the Market Fix the Market? A Theory of Stock Exchange Competition and Innovation
with Eric Budish, Robin S. Lee: w25855
Will the market adopt new market designs that address the negative aspects of high-frequency trading? This paper builds a theoretical model of stock exchange competition, shaped by institutional and regulatory details of the U.S. equities market. We show that under the status quo market design: (i) trading behavior across the many distinct exchanges is as if there is just a single “synthesized” exchange; (ii) as a result, trading fees are perfectly competitive; but (iii) exchanges capture and maintain significant economic rents from the sale of “speed technology” (i.e., proprietary data feeds and co-location)—arms for the high-frequency trading arms race. Using a variety of data, we document seven stylized empirical facts that suggest that the model captures the essential economics of how ...
 
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