Competing on Speed

Pagnotta, Emiliano; Philippon, Thomas

doi:10.2139/ssrn.1928792

Cited by 56 publications

(66 citation statements)

References 0 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…More recent theory papers tend to associate fragmentation with welfare increases through the following mechanisms: lower trading fees (Colliard and Foucault, 2012); and greater product differentiation, which benefits heterogeneous investors (Pagnotta and Philippon, 2013).…”

Section: Related Literaturementioning

confidence: 99%

Trading in Fragmented Markets

Baldauf¹,

Mollner²

2020

J. Financ. Quant. Anal.

View full text Add to dashboard Cite

We study fragmentation of equity trading using a model of imperfect competition among exchanges. In the model, increased competition drives down trading fees. However, additional arbitrage opportunities arise in fragmented markets, intensifying adverse selection. Due to these opposing forces, the effects of fragmentation are context dependent. To empirically investigate the ambiguity in a single context, we estimate key parameters of the model with order-level data for an Australian security. According to the estimates, the benefits of increased competition are outweighed by the costs of multi-venue arbitrage. Compared with the prevailing duopoly, we predict the counterfactual monopoly spread to be 23% lower.

show abstract

Section: Related Literaturementioning

confidence: 99%

Trading in Fragmented Markets

Baldauf¹,

Mollner²

2020

J. Financ. Quant. Anal.

View full text Add to dashboard Cite

show abstract

“…One strand has dropped the possibility of trading in a pure decentralized market, but has incorporated additional features-including finitely many types -into a model where all trades are executed through a pure dealer market. See, for instance, Weill (2007), Lagos and Rocheteau (2009), Gârleanu (2009), Weill (2011), Feldhütter (2012), Pagnotta and Philippon (2011), and Lester, Rocheteau, and Weill (2015). Although abstracting from decentralized trade is beneficial for maintaining tractability, it also implies that these models are less helpful in addressing certain markets and issues.…”

Section: Related Literaturementioning

confidence: 99%

Heterogeneity in Decentralized Asset Markets

Hugonnier¹,

Lester²,

Weill³

2015

SSRN Journal

View full text Add to dashboard Cite

We study a search and bargaining model of an asset market, where investors' heterogeneous valuations for the asset are drawn from an arbitrary distribution. Our solution technique makes the model fully tractable and allows us to provide a full characterization of the unique equilibrium, in closed-form, both in and out of steady-state. Using this characterization, we first establish that the model generates aggregate trading patterns that are consistent with those observed in many over-the-counter asset markets. Then, we show that the model can replicate empirical regularities reported from micro-level data sets, including the relationships between the length of the intermediation chains through which assets are reallocated, the network centrality of the dealers involved in these chains, and the markup charged on the asset being passed along the chain. Finally, we show that heterogeneity magnifies the price impact of search frictions, and that this impact is more pronounced on price levels than on price dispersion. Hence, using observed price dispersion to quantify the effect of search frictions on price discounts or premia can be misleading. Julien Hugonnier Ecole Polytechnnique Fédérale de LausanneQuartier UNIL Dorigny Extranef #212 1015 Lausanne Switzerland and Swiss Finance Institute price discounts or premia can be misleading: price dispersion can essentially vanish while price levels are still far from their frictionless counterpart.Our model, which we formally describe in Section 2, starts with the basic building blocks of DGP. There is a measure one of investors who can hold either zero or one share of an asset in fixed supply. Investors have stochastic, time-varying utility types that generate heterogenous valuations for the asset. Each investor is periodically and randomly matched with another, and a transaction ensues if there are gains from trade, with prices being determined by Nash bargaining. Our point of departure from DGP is that we allow utility types to be drawn from an arbitrary distribution.Allowing for more than two types changes the nature of the analysis significantly, as it implies that individual investors now face ex ante uncertainty about the utility types of potential trading partners, and hence about the terms of trade. More precisely, the relevant state variable in our model is an infinite-dimensional object: the distributions of the utility types among investors that hold zero and one asset, respectively, over time.Despite this greater complexity, we show in Section 3 that the model remains fully tractable. In particular, we characterize the equilibrium, in closed form, both in and out of the steady state. This requires deriving explicit solutions for the joint distributions of asset holdings and utility types, and for investors' reservation values; both of these derivations are new to the literature. Moreover, in contrast to the usual guess-and-verify approach, we establish several elementary properties of reservation values directly-without making a priori assumptions on the direc...

show abstract

“…Foucault, Kadan, and Kandel (2013) develop a model based on an endogenous reaction time to trading activities, and find that algorithmic trading plays an important role in monitoring the state of liquidity cycles. Biais, Foucault, and Moinas (2015) and Pagnotta and Philippon (2015) analyze competition on speed. They argue that competition should have a positive effect on the price discovery process.…”

Section: Introductionmentioning

confidence: 99%

Profitability and Market Quality of High Frequency Market-Makers: An Empirical Investigation

Yergeau

2016

SSRN Journal

View full text Add to dashboard Cite

Financial markets in contemporary regulatory settings require the presence of high-frequency liquidity providers. We present an applied study of the profitability and the impact on market quality of an individual high-frequency trader acting as a market-maker. Using a sample of sixty stocks over a six-month period, we implement the optimal quoting policy (OQP) of liquidity provision from Ait-Sahalia and Saglam (2014) dynamic inventory management model. The OQP allows the high-frequency trader to extract a constant annuity from the market but its profitability is insufficient to cover the costs of market-making activities. The OQP is embedded in a trading strategy that relaxes the model's constraint on the quantity traded. Circuit-breakers are implemented and market imperfections are considered. Profits excluding maker-fees and considering transaction fees are economically significant. We propose a methodology to adjust the returns for asynchronous trading and varying leverage levels associated with dynamic inventory management. This allows us to qualify high trade volume as a proxy of informed trading. The high-frequency trader behaves as a constant liquidity provider and has a positive effect on market quality even in periods of market stress.

show abstract

Competing on Speed

Cited by 56 publications

References 0 publications

Trading in Fragmented Markets

Trading in Fragmented Markets

Heterogeneity in Decentralized Asset Markets

Profitability and Market Quality of High Frequency Market-Makers: An Empirical Investigation

Contact Info

Product

Resources

About