Abstract
We analyze trading speed and fragmentation in asset markets. Trading venues make technological investments and compete for investors who choose where and how much to trade. Faster venues charge higher fees and attract speed-sensitive investors. Competition among venues increases investor participation, trading volumes, and allocative efficiency but entry and fragmentation can be excessive, and speeds are inefficient. Regulations that protect transaction prices (e.g., Securities and Exchange Commission trade-through rule) lead to greater fragmentation and faster speeds but may reduce allocative efficiency. Our model sheds light on the experience of European and U.S. markets since the implementation of Markets in Financial Instruments Directive and Regulation National Markets System.The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2047536
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