Speed Acquisition

Abstract

Speed has become a salient feature of modern financial markets. This paper studies investors’ endogenous speed acquisition, alongside their information acquisition. In equilibrium, speed heterogeneity endogenously arises across investors, temporally fragmenting the price discovery process. A deterioration in the long-run price informativeness ensues. Intra- and inter-temporal competition among investors drive speed and information to be either substitutes or complements. The model cautions the possible dysfunction of price discovery: An advancing information technology might complement speed acquisition, which fragments the price discovery process, thus hurting price informativeness. Novel predictions are discussed regarding investor composition, fund performance, and trading volume.