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 Notre Dame

NBER Working Papers and Publications

May 2019A Theory of Stock Exchange Competition and Innovation: Will the Market Fix the Market?
with Eric Budish, Robin S. Lee: w25855
This paper builds a model of stock exchange competition tailored to the institutional and regulatory details of the modern U.S. stock market. The model shows that under the status quo market design: (i) trading behavior across the seemingly fragmented exchanges is as if there is just a single synthesized exchange; (ii) as a result, trading fees are perfectly competitive; (iii) however, exchanges are able to capture and maintain economic rents from the sale of speed technology such as proprietary data feeds and co-location — arms for the high-frequency trading arms race. We document stylized empirical facts consistent with each of the three main results of the theory. We then use the model to examine the private and social incentives for exchanges to adopt new market designs, such as freque...
 
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