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Information Technology and Time-Based Competition in Financial Markets

Author

Listed:
  • Sanjeev Dewan

    (Graduate School of Management, University of California, Irvine, California 92697)

  • Haim Mendelson

    (Graduate School of Business, Stanford University, Stanford, California 94305)

Abstract

This paper studies time-based competition in imperfect securities markets, linking IT investment decisions, information processing delays, and trading strategies. At the IT investment stage, traders trade off the cost of IT against their anticipated trading profits. At the trading stage, each trader devises a trading strategy based on his new information while taking into account the impact of both his own trades and those of other traders in the market. Our results illustrate how traders react to market imperfections due to trading costs and information processing delays, and how superior traders convert a timeliness advantage into higher trading profits. They also shed light on the relationship between the price adjustment process and traders' information processing delays. Timeliness imposes an interesting structure on trader competition: traders with longer information processing delays trade less frequently, submit smaller orders and enjoy lower profits per trade. Our analysis of traders' IT investment decisions demonstrates how factors such as IT costs, number of traders, and the frequency and nature of new information affect the level of IT investments. We further illustrate how improved IT infrastructure translates into competitive advantage.

Suggested Citation

  • Sanjeev Dewan & Haim Mendelson, 1998. "Information Technology and Time-Based Competition in Financial Markets," Management Science, INFORMS, vol. 44(5), pages 595-609, May.
    • Handle: RePEc:inm:ormnsc:v:44:y:1998:i:5:p:595-609
    DOI: 10.1287/mnsc.44.5.595
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    References listed on IDEAS

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    Cited by:

    1. Sanjeev Dewan & Kenneth L. Kraemer, 2000. "Information Technology and Productivity: Evidence from Country-Level Data," Management Science, INFORMS, vol. 46(4), pages 548-562, April.
    2. Prabhudev Konana & Sudha Ram, 1999. "Semantics-Based Transaction Processing for Real-Time Databases: The Case of Automated Stock Trading," INFORMS Journal on Computing, INFORMS, vol. 11(3), pages 299-315, August.
    3. Richardson, Vernon J. & Sanchez, Juan Manuel & Setia, Pankaj & Smith, Rodney, 2018. "Determinants and consequences of chief information officer equity incentives," International Journal of Accounting Information Systems, Elsevier, vol. 31(C), pages 37-57.
    4. Sanjeev Dewan & Haim Mendelson, 2001. "Information Technology and Trader Competition in Financial Markets: Endogenous Liquidity," Management Science, INFORMS, vol. 47(12), pages 1581-1587, December.
    5. Philipp Afèche & Haim Mendelson, 2004. "Pricing and Priority Auctions in Queueing Systems with a Generalized Delay Cost Structure," Management Science, INFORMS, vol. 50(7), pages 869-882, July.
    6. Firas H. Al-Hammadany & Almas Heshmati, 2011. "Analysis of the Purpose of Using Internet in Iraq: A Multinomial Logit Model," Journal of Knowledge Management, Economics and Information Technology, ScientificPapers.org, vol. 1(6), pages 1-41, October.
    7. Vernon N. Hsu & Susan H. Xu & Boris Jukic, 2009. "Optimal Scheduling and Incentive Compatible Pricing for a Service System with Quality of Service Guarantees," Manufacturing & Service Operations Management, INFORMS, vol. 11(3), pages 375-396, May.
    8. Rajiv Banker & Yi Liang & Narayan Ramasubbu, 2021. "Technical Debt and Firm Performance," Management Science, INFORMS, vol. 67(5), pages 3174-3194, May.
    9. Gangopadhyay, Partha & Nilakantan, Rahul, 2021. "Peer effects and social learning in banks’ investments in information technology," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 456-463.
    10. Maxim Afanasyev & Haim Mendelson, 2010. "Service Provider Competition: Delay Cost Structure, Segmentation, and Cost Advantage," Manufacturing & Service Operations Management, INFORMS, vol. 12(2), pages 213-235, May.
    11. Mahajan, Jayashree & Vakharia, Asoo J., 2004. "Determining firm-level IT investments to facilitate value chain activities: Should spillovers accruing to value chain members be incorporated?," European Journal of Operational Research, Elsevier, vol. 156(3), pages 665-682, August.
    12. Rajiv D. Banker & Robert J. Kauffman, 2004. "50th Anniversary Article: The Evolution of Research on Information Systems: A Fiftieth-Year Survey of the Literature in Management Science," Management Science, INFORMS, vol. 50(3), pages 281-298, March.
    13. Kasing Man & Junbo Wang & Chunchi Wu, 2013. "Price Discovery in the U.S. Treasury Market: Automation vs. Intermediation," Management Science, INFORMS, vol. 59(3), pages 695-714, September.

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