Tomy Lee

Assistant Professor, Economics and Business, Central European University

Research Interests: OTC Markets, Design of Financial Markets, Information and Learning in Finance, Applied Theory

CV: Click Here

Contact: leeso[at]


Review of Economic Dynamics (Special Issue on Fragmented Financial Markets; available:

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.

Working Papers

(with Chaojun Wang)

Conference Presentations: AFA 2020, FML Budapest 2019, 2018: AMES, ASSA, CBC Hong Kong, EFA, EUROfidai

Despite the availability of low-cost exchanges, over-the-counter (OTC) trading is pervasive for most assets. We explain the prevalence of OTC trading using a model of adverse selection, in which informed and uninformed investors choose to trade over-the-counter or on an exchange. OTC dealers' ability to price discriminate allows them to imperfectly cream-skim the uninformed investors from the exchange. Assets with lower adverse selection risk are predicted to have a higher share of trades executed over-the-counter, as observed in practice. Having an OTC market can reduce welfare while increasing total trade volume and decreasing average bid-ask spread. Specifically, for assets that are mostly traded over-the-counter (such as swaps and bonds), having the OTC market actually harms welfare. Our results justify recent policies that seek to end OTC trading in such assets.

Works in Progress

Welfare in Public Markets

(with Corey Garriott)

Sticking to One: Trading Relationships in Over-the-Counter Markets

(with Liyan Yang)

Over-the-counter (OTC) trading is relationship based, in which investors trade exclusively with a few dealers. This exclusivity in OTC trading relationships is typically viewed as an inefficient outcome of limited competition among dealers. We show to the contrary that exclusive trading relationships can arise as a competitive outcome, using a model of endogenous learning in which informed and uninformed investors trade with dealers over time. The dealers learn about an investor's type based on past trades with the investor, which incentivizes each uninformed investor to trade repeatedly with the same dealer and each informed investor to mimic the uninformed investors. Moreover, exclusivity in trading relationships increases both liquidity and price discovery. Exclusivity gives dealers access to investors' trading histories, leading informed investors to trade less aggressively, which increases liquidity, while allowing the dealers to identify those who are more likely to be informed, which increases price discovery.