Leakage in financial marketplaces and digital marketplaces
in financial marketplaces leakage is the fact that some market participants are aware of one piece of information way before other participants. It is a major feature of today’s speed trading. In another article, I will talk about market fragmentation in financial marketplaces and market aggregation in digital marketplaces. Financial markets are fragmented into so many marketplaces and leakage happens when participants are trading on two or more marketplaces but one of these participants has a better network link between the marketplaces than others. In such a situation the advantaged participant can exploit this speed advantage to front-run the others. This participant get a piece of information at the same time than others into one marketplace but is able to exploit it in the next marketplaces before others do. From the point of view of the marketplace exploited it appears like a leakage. IEX speed bump attempts to eradicate this kind of exploitation but raise a last look option which is still in theory without proof of real exploitations.
In digital marketplaces, leakage is simply the fact that two participants of a given marketplace are able to make transactions outside the marketplace. That why it is a requirement for a digital marketplace to own the transactions flow. Digital marketplaces must lock participants into by incentivizing them, by anonymizing participants or by just applying leakage fees. Whether it is a financial marketplace or a digital marketplace it happens that leakage must be taken into consideration.
if you want to discover another type of leakage outside of my expertise look at THIS
