Intermediation and Price Volatility. / Ritzberger, Klaus; Gehrig, Thomas.

In: Journal of Economic Theory, 01.03.2022.

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Abstract

This paper analyses the role of intermediaries in providing immediacy in fast markets. Fast markets are modelled as contests with the possibility of multiple winners where the probability of casting the best quote depends on prior technology investments. Depending on the market design, equilibrium pricing by intermediaries involves a trade-off, between monopolistic price distortion and excess volatility. Since equilibrium at the pricing stage generates an externality, investments into faster trading technologies are necessarily asymmetric in equilibrium, akin to markets with vertical product dierentiation. Further, equilibrium is not necessarily effcient, since it is possible that a high-cost intermediary ends up investing excessively and thus trades more frequently than low-cost rivals.
Original languageEnglish
Article numberJET-D-20-00886R2
Number of pages38
JournalJournal of Economic Theory
Publication statusAccepted/In press - 1 Mar 2022

ID: 44603282