Financial Regulation and Automation Adoption: Evidence from Stock Trading Firms

How did trading automation impact broker-dealer firms and workers? While electronic platforms have been available in stock markets for decades, widespread adoption of automated trading occurred only after the major market redesign promoted by the US Securities and Exchange Commission. With the intent of lowering access costs to stock markets, Regulation NMS fostered speed-driven competition in the investment industry. By combining several sources of regulatory records, I construct a rich, linked panel of trading firms and workers with detailed employment records, licenses, and financial information. I show that trading automation increased aggregate profits in the investment industry and induced greater revenue concentration. Consistent with higher technology setup requirements and increased local competition, the entry of new broker-dealers decreases. Survival rates of existing firms display a U-shaped pattern in employment: large, multi-billion dollar investment firms, as well as small brokers who usually engage in proprietary trading, become more likely to stay in business. Trading automation generated significant employment displacement effects, decreasing the probability of stock traders remaining employed, even when compared to investment advisors, bond traders, and other financial workers in less automated markets. Through a series of tests, I show that these results are unlikely to be driven by the Great Recession or the rise in online brokerage services. Overall, my findings offer evidence that trading firms providing services to a small portion of investors benefited from trading automation. *I am very grateful to Scott Irwin, Michel Robe, and Dan Bernhardt for their continuous guidance and support. I also thank Yashar Barardehi, Aymeric Bellon, Philip Garcia, Benedict Guttman-Kenney, Richard Haynes, Jared Hutchins, Joe Janzen, Sida Li, Tong Liu, Charles Martineau, Tatiana Mocanu, Carl Nelson, George Pennacchi, Teresa Serra, Bruce Sherrick, Simon Schmickler, Chong Shu, Mao Ye, and participants at the 2020 EALESOLE-AASLE, 2020 Young Economists Symposium, 2020 Empirics and Methods in Economics Conference, 2020 Brazilian Econometric Society Meeting, 2021 North American Summer Meeting of the Econometric Society, 2021 Australasian Meeting of the Econometric Society, 2021 European Summer Meeting of the Econometric Society, and seminars at the University of Illinois for insightful discussions and comments. †Ph.D. candidate, University of Illinois at Urbana-Champaign. Email: prossi2@illinois.edu.

• Publication year

  2022

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  Social Science Research Network

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  Unknown publication date

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  DOI 10.2139/ssrn.4288923
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  Open on Semantic Scholar

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  Semantic Scholar

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