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Slowing Down the Speed of Stock Markets

Earlier this year, the SEC approved Intercontinental Exchange, or IEX, a new American stock exchange. Given that there are over a dozen existing American stock exchanges, this would seem to be a rather trivial event that does little to change the dynamic of the America stock markets. Surprisingly, the emergence of IEX is a big deal, with existing stock exchanges like NASDAQ even threatening to sue the SEC for approving IEX. Presently, American stock markets are dominated by high-speed traders who “have a faster view of changing quotes” and who can thus take advantage of investors with a slower view of markets, with the high-speed traders able to buy and sell before those investors even realize anything has changed.

The IEX is hoping to eliminate existing advantages given to high-speed traders by enforcing a 350-microsecond speed bump on all trades to slow down the market for high-speed traders. This new business model is starting to gain momentum within the world of American stock exchanges; rival exchanges including NASDAQ and the New York Stock Exchange are considering implementing different measures to slow the pace of trading. This market shift relates to the concept of Nash Equilibrium in trading networks, which was discussed in lecture. One requirement to achieve Nash Equilibrium is that a trader can make profit only if that trader has an edge that must be used in any social welfare maximizing flow. High-speed traders make profit, yet are not vital to maximizing social welfare. Presently, within the span of a fraction of a second, these traders are able to see an investor market stock order before it is processed, go into the market and buy that same stock and then sell it back to the investor at a slightly higher price. Removing the high-speed trader does not lower the social welfare. By attempting to slow down trading to remove high-speed traders from the equation, IEX and other American stock exchanges are attempting to push the stock trading network towards a Nash Equilibrium.



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October 2016