Information Diffusion and Speed Competition

Abstract

Speed hierarchy not only motivates fast trading competition on less precise information but also renders slower traders more informative. As a result, endogenous speed acquisition in equilibrium affects how information is produced and spread. When information diffusion is characterized by its disclosure level (measured by initial information precision) and dissemination rate (at which heterogeneous information disperses across investors), these factors can have opposite impacts on price discovery. High disclosure leads to more informative fast trading, while fast dissemination crowds out fast traders. Channeled by strategic complementarity of late to early trading, price discovery is improved with disclosure but reduced with dissemination over the short and long run. The model developed in this paper makes additional predictions for fast and informed trading patterns.