Who Benefits from Securities Exchange Innovation?

Securities exchanges continuously innovate to keep pace with technology. It is often debated if such innovation is beneficial and which market participants capture the benefits. We contribute to this debate by examining liquidity effects of a wide range of proprietary products and services introduced by exchanges in the United States between 2003 and 2017. Exchange innovation is generally associated with liquidity improvements for those investors, who trade in small quantities. The effect is opposite for institutional investors; their trading costs increase, and their market participation declines.