Competing on Speed

Résumé

Speed and fragmentation have reshaped global securities markets: Large-cap U.S. stocks can now be traded in almost 50 venues, and execution times are measured in milliseconds. We analyze these evolutions in a model where exchanges invest in trading speed and compete for investors who choose where and how much to trade. Faster venues charge higher fees and attract speed-sensitive investors. Competition among exchanges increases investor participation, traded volumes, and allocative efficiency but can lead to socially excessive levels of speed. Regulations that protect investors (e.g. SEC's trade-through) lead to more fragmentation and faster speeds, but may reduce welfare. Independently of technology and entry costs, the optimal design has a single operating exchange. Our model sheds light on the experience of European and U.S. markets since the implementation of MiFID and Reg NMS.