Market design

Agarwal, Nikhil; Budish, Eric

doi:10.1016/bs.hesind.2021.11.010

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2021

2024

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Cited by 8 publications

(1 citation statement)

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“…To analyze our questions, we build a model that is closely tailored to the institutional details of modern electronic financial exchanges. Some aspects of the model are tailored specifically to regula-1 For recent surveys of the market design literature, see Roth (2018), Milgrom (2021) and Agarwal and Budish (2021). 2 See Budish, Cramton and Shim (2015) for the definition of latency arbitrage and the market-design reform of frequent batch auctions.…”

Section: Introductionmentioning

confidence: 99%

A Theory of Stock Exchange Competition and Innovation: Will the Market Fix the Market?

Budish,

Lee,

Shim

2024

Journal of Political Economy

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Will stock exchanges innovate to address latency arbitrage and the arms race for speed? This paper models how exchanges compete in the modern electronic era and how this shapes incentives for market design innovation. In the status quo, exchange trading fees are competitive while exchanges earn economic rents from selling speed. These rents create a wedge between private and social incentives to innovate, and support the persistence of an inefficient market design in equilibrium of a market design adoption game. We discuss implications for policy and insights for the literatures on market design, innovation, and platforms.

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