Abstract
Do faster information diffusion and informed trading improve price discovery? Based on Hong and Stein (1999), we develop a two-period endogenous equilibrium model of speed acquisition where traders receive heterogeneous information from a diffusion process. While faster information diffusion makes slow traders more informed, it also intensifies competition as the same information is observed by more traders. When there is sufficiently large fraction of slow traders, the competition effect dominates, which increases a first-mover advantage to fast traders. Hence faster information dissemination can “crowd in” fast trading and improve price discovery in both periods, although more investors rush to trade quickly with less precise information. However, with fully informed traders participating in the market at late trading round, faster information dissemination reduces information rent. Due to the complementarity of speed acquisition to information production, this further “crowds out” fast traders and therefore reduces price discovery.
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