Tomy Lee

I examine the impact of cross-venue latency on market quality using a model of informed trader competition in a fragmented market. As cross-venue latency decreases, liquidity and price discovery improve while the expected profits of informed traders decline. Moreover, a fall in the latency of one venue can harm liquidity at the other venue. An extension predicts that, as the informed traders consolidate or outsource trading, benefits of shorter cross-venue latency are attenuated and its harmful effects intensify. My model generates testable predictions about the effects of changes in cross-venue latency on market quality.

Over-the-counter (OTC) trading thrives despite competition from exchanges. We let OTC dealers cream skim from exchanges in an otherwise standard Glosten and Milgrom (1985) framework. Restricting the dealer's ability to cream skim induces ``cheap substitution'': some traders exit while others with larger gains from trade enter. Cheap substitution implies trading costs, trade volumes, and market shares are poor policy indicators. In a benchmark case, restricting the dealer raises welfare only if trading cost increases, volume falls, and OTC market share is high. By contrast, the restriction improves welfare when adverse selection risk is low. A simple procedure implements the optimal Pigouvian tax.

We evaluate the enforcement of information barriers—China Walls—within conglomerates. Our setting is the 23 million trades in 2019-2024 in the Israeli Shekel market, where the US SEC imposes China Walls around dealers. Our difference-in-differences design compares the trade volumes and profits of funds that are affiliated with, clients of, or entirely unrelated to a dealer around the days when the dealer is especially likely to hold valuable information. Dealers never trade or share information with their affiliate funds, despite that they do share information with their clients, and funds within the same conglomerate do so among themselves. Our findings persist in crisis and noncrisis periods and across granular cells of fund and asset characteristics. From a back-of-the-envelope calculation, imposing China Walls around funds would eliminate $23.7 billion in trades. We reveal a remarkable regulatory capacity to control information flows within conglomerates.

We introduce nonrival public goods to global games of regime change. Each investor in a large project is vanishingly unlikely to be pivotal for its survival. She also benefits from its enormous public goods. In equilibrium, this large benefit precisely counterbalances her vanishing pivotal likelihood, such that even an atomistic and selfish investor internalizes her marginal impact on project survival. Extended to an economy of firms, any divestment yields financial gains whenever it positively assorts projects’ public goods with investors’ sensitivities to those goods. Yet, such divestments can harm the social surplus. Our tractable framework rationalizes investor behavior during the Euro crisis, the collapse of Terra, and the 2023 bank runs.

We identify a widespread practice that counteracts fragmentation in the corporate bond market. On modern trading platforms, traders can simultaneously request quotes for many bonds from dealers, then trade against any subset of the dealers' quotes. Such List requests comprise 80% of all requests on MarketAxess, the largest corporate bond platform. Using the 10 million requests on MarketAxess in 2021-2022 linked to List-level identifiers, we document that traders substitute across bonds within the same List. Fifth of bonds in Lists are abandoned without a fill. Within a List, a bond quoted the higher-ranking spread is discontinuously more likely to fill than a bond quoted a nearly identical yet lower-ranking spread. Dealers intensively substitute within their Lists, whereas passive funds typically fill every bond in their Lists. The modern bond market evolved a simple mechanism to address fragmentation.