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 China Walls—information barriers within conglomerates. We focus on July 2018, when the SEC tightened enforcement around broker-dealer subsidiaries, and on the 25 million Israeli Shekel trades over 2018–2024. Our difference-in-differences design compares a dealer's affiliate, connected, and unrelated funds on days when the dealer likely obtained valuable information. Before July 2018, dealers share information with their affiliate and connected funds. After July 2018: the sharing ceases only with the affiliate funds; price discovery slows; trading costs fall for affiliate funds and rise for other funds. Tightly enforced walls eliminated 99.0% of affiliate funds' event-day profits.

We introduce nonrival public goods into global games of regime change to rationalize investor behavior in the Euro crisis, the collapse of Terra, and the 2023 bank runs. As more investors join a project, each investor has a shrinking financial claim and becomes less likely to be pivotal for project continuation. The financial claim and the pivotal probability shrink at the same rate, such that even an atomistic investor considers her marginal impact on project continuation. We predict lower sovereign risk as the domestic share of government debt increases, justifying patriotic bonds. A planner can compress each funding investor's payoff toward her exit payoff, shrinking the financial gamble. Compression raises the continuation probability of a project with a net public good and lowers it for a project with a net public bad. The optimal intensity does not depend on the magnitude of the net public good.

We identify a widespread trading practice that mitigates fragmentation in the corporate bond market. On modern electronic platforms, traders request quotes for multiple bonds simultaneously and execute against any subset of the quotes. These List requests account for about 80% of all requests on MarketAxess in 2021–2022. Using List-level identifiers, we show that traders substitute across bonds within each List to mitigate quote uncertainty. This uncertainty is decreasing in the bond's offering size, an inverse proxy for fragmentation. Substitution is stronger among more fragmented bonds and between those with similar maturities and yields. Substitution within Lists reduces the average spread paid by roughly two-thirds relative to accepting all best quotes.

Centralized trading platforms should improve competition in OTC markets. Using transaction records from the U.S. corporate bond market and exploiting variation within client-dealer relationships, we find no evidence that clients receive better secondary-market trading terms after adopting a platform. To reconcile this puzzling finding, we present a model in which relationship dealers operate in both primary and secondary markets. A central insight, for which we find strong empirical support, is that dealers respond to clients' improved outside options not by changing secondary-market terms, but by granting larger primary-market allocations. Guided by the model, we estimate that platform adoption is worth 77% of clients' pre-adoption profits from primary-market allocations. Overall, the effects of platforms in OTC markets are more complex than previously thought.