Organizational Changes and Structural (Dis)advantages in Digital Economy: The Case of Latency in Financial Markets

• In Event: Organizing Technoscientific Capitalism: Epistemic Values, Practices & Assets - III

Abstract

This paper explores the changes in the competitive landscape in the digital economy by examining the systematic (dis)advantages that emerged in the U.S. financial markets due to technological infrastructure and interorganizational relationships mediated by technology. While the shift to the electronic market that began in the 1970s dramatically democratized the market by removing the barriers to directly accessing the market, it created structural (dis)advantages associated latency in the market data, i.e., the time the electronic signals that contain market data take to travel from exchanges to market participants. I analyze the sources of data: 1) documents published by the firms, regulators, and researchers in the U.S. securities markets since the 2000s and 2) 150 interviews with financial market participants. The findings from the analysis illustrate that the structural issue associated with latency is the result of organizational changes in the financial markets that accompanied the electronization. The exchanges transitioned from not-for-profit mutual firms to for-profit firms during the electronization since they could no longer provide their members near-monopoly to trading. A new type of trading firms that rely on algorithms and can exploit even trivial speed differentials emerged. To generate more revenue, exchanges developed premium data and trading services with different speed for which algorithmic trading firms are willing to pay premiums. Although financial market participants have always strived for advance information, this tiered model of data latency creates heightened discontent among market participants as they are disembedded in the electronic market and engage more with opportunistic practices.

Author

• Bo Hee Min, Copenhagen Business School