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Guess what: it's the settlements!

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  • Koeppl, Thorsten Volker
  • Monnet, Cyril

Abstract

Exchanges and other trading platforms are often vertically integrated to carry out trading, clearing and settlement as one operation. We show that such vertical silos can prevent efficiency gains from horizontal consolidation of trading and settlement platforms to be realized. Independent of the gains from such consolidation, when costs of settlement are private information, there is no mechanism that achieves the merger of the vertical silos in a way that trading and settlement are produced efficiently after the merger. Furthermore, we show that such an ex-post efficient merger can always be implemented by delegating the operation of settlement platforms to agents. JEL Classification: C73, G20, G34, L22

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0375.

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Date of creation: Jul 2004
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Handle: RePEc:ecb:ecbwps:20040375

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Keywords: Clearing and Settlement; Horizontal and Vertical Integration; Mechanism Design;

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References

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  1. Tano Santos & José A. Scheinkman, 2000. "Competition Among Exchanges," CRSP working papers 514, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. Shy, Oz & Tarkka, Juha, 2001. "Stock exchange alliances, access fees and competition," Research Discussion Papers 22/2001, Bank of Finland.
  3. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
  4. Schmiedel, Heiko & Malkamäki, Markku & Tarkka , Juha, 2002. "Economies of scale and technological development in securities depository and settlement systems," Research Discussion Papers 26/2002, Bank of Finland.
  5. Kauko, Karlo, 2005. "Interlinking securities settlement systems: a strategic commitment?," Working Paper Series 0427, European Central Bank.
  6. Tapking, Jens & Yang, Jing, 2006. "Horizontal and Vertical Integration in Securities Trading and Settlement," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1765-1795, October.
  7. repec:fth:bfdipa:22/2001 is not listed on IDEAS
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Cited by:
  1. Holthausen, Cornelia & Tapking, Jens, 2007. "Raising rival's costs in the securities settlement industry," Journal of Financial Intermediation, Elsevier, vol. 16(1), pages 91-116, January.
  2. Jens Tapking & Jing Yang, 2004. "Horizontal and vertical integration in securities trading and settlement," Bank of England working papers 245, Bank of England.
  3. Tapking, Jens, 2007. "Pricing of settlement link services and mergers of central securities depositories," Working Paper Series 0710, European Central Bank.
  4. Koppl, Thorsten V. & Monnet, Cyril, 2007. "Guess what: It's the settlements! Vertical integration as a barrier to efficient exchange consolidation," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3013-3033, October.
  5. Serifsoy, Baris, 2007. "Stock exchange business models and their operative performance," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 2978-3012, October.
  6. Séverine Vandelanoite & Frédéric Cherbonnier, 2007. "Enjeux économiques liés à l’intégration des industries du post-marché en Europe," Revue d'Économie Financière, Programme National Persée, vol. 89(3), pages 123-142.

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