Competing on Speed

We analyze trading speed and fragmentation in asset markets. In our model, trading venuesmake technological investments and compete for investors who choose where and how much to trade. Faster venuescharge higher fees and attract speed†sensitive investors. Competition among venuesincreases investor participation, trading volume, and allocative efficiency, but entry and fragmentation can be excessive, and speeds are generically inefficient. Regulations that protect transaction prices (e.g., Securities and Exchange Commission trade†through rule) lead to greater fragmentation. Our model sheds light on the experience of European and U.S. markets since the implementation of Markets in Financial InstrumentsDirective and Regulation National Markets System.