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Competition between Exchanges: Euronext versus Xetra

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  • Maria Kasch-Haroutounian
  • Erik Theissen

Abstract

"Exchanges in Europe are in a process of consolidation. After the failure of the proposed merger between Deutsche Börse and Euronext, these two groups are likely to become the nuclei for further mergers and co-operation with currently independent exchanges. A decision for one of the groups entails a decision for the respective trading platform. Against that background we evaluate the attractiveness of the two dominant continental European trading systems. Though both are anonymous electronic limit order books, there are important differences in the trading protocols. We use a matched-sample approach to compare execution costs in Euronext Paris and Xetra. We find that both quoted and effective spreads are lower in Xetra. The differences are more pronounced for less liquid stocks. When decomposing the spread we find no systematic differences in the adverse selection component. Realised spreads, on the other hand, are significantly higher in Euronext. Neither differences in the number of liquidity provision agreements nor differences in the minimum tick size or in the degree of domestic competition for order flow explain the different spread levels. We thus conclude that Xetra is the more efficient trading system". Copyright (c) 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by European Financial Management Association in its journal European Financial Management.

Volume (Year): 15 (2009)
Issue (Month): 1 ()
Pages: 181-207

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Handle: RePEc:bla:eufman:v:15:y:2009:i:1:p:181-207

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  1. Kumar Venkataraman, 2001. "Automated Versus Floor Trading: An Analysis of Execution Costs on the Paris and New York Exchanges," Journal of Finance, American Finance Association, vol. 56(4), pages 1445-1485, 08.
  2. Battalio, Robert & Greene, Jason & Jennings, Robert, 1997. "Do Competing Specialists and Preferencing Dealers Affect Market Quality?," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 969-93.
  3. Ronen, Tavy & Weaver, Daniel G., 2001. "'Teenies' anyone?," Journal of Financial Markets, Elsevier, vol. 4(3), pages 231-260, June.
  4. Affleck-Graves, John & Hegde, Shantaram P & Miller, Robert E, 1994. " Trading Mechanisms and the Components of the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 49(4), pages 1471-88, September.
  5. Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July.
  6. Domowitz, Ian & Glen, Jack & Madhavan, Ananth, 2001. "Liquidity, Volatility and Equity Trading Costs across Countries and over Time," International Finance, Wiley Blackwell, vol. 4(2), pages 221-55, Summer.
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Cited by:
  1. Susan Thomas, 2010. "Call auctions : A solution to some difficulties in Indian finance," Finance Working Papers 23028, East Asian Bureau of Economic Research.
  2. Giofré, Maela, 2013. "International diversification: Households versus institutional investors," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 145-176.
  3. Gomber, Peter & Schweickert, Uwe & Theissen, Erik, 2011. "Liquidity dynamics in an electronic open limit order book: An event study approach," CFR Working Papers 11-14, University of Cologne, Centre for Financial Research (CFR).
  4. Idier, J., 2006. "Stock exchanges industry consolidation and shock transmission," Working papers 159, Banque de France.

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