Regulation of Differentiated Stock Exchanges

Résumé

Horizontally differentiated asset exchanges split the order flow from liquidity traders. These traders have heterogeneous preferences over exchange characteris- tics and experience a positive liquidity externality from trading in the same place. We show that the co-existence of suitably differentiated exchanges is stable once heterogeneity is sufficiently great. Stability is neither sufficient nor necessary for co-existence to yield optimal liquidity trader welfare. This leaves a role for careful regulation of exchange differentiation.