Two forces have reshaped global securities markets in the last decade: Exchanges
operate at much faster speeds and the trading landscape has become more fragmented.
In order to analyze the positive and normative implications of these evolutions, we
study a framework that captures (i) exchanges’ incentives to invest in faster trading
technologies and (ii) investors’ trading and participation decisions. Our model predicts
that regulations that protect prices will lead to fragmentation and faster trading
speed. Asset prices decrease when there is intermediation competition and are further
depressed by price protection. Endogenizing speed can also change the slope of asset
demand curves. On normative side, we find that for a given number of exchanges, faster
trading is in general socially desirable. Similarly, for a given trading speed, competition
among exchange increases participation and welfare. However, when speed is endogenous,
competition between exchanges is not necessarily desirable. In particular, speed
can be inefficiently high. Our model sheds light on important features of the experience
of European and U.S. markets since the implementation of MiFID and Reg. NMS, and
provides some guidance for optimal regulations.