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Raising rival's costs in the securities settlement industry

Author

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  • Holthausen, Cornelia
  • Tapking, Jens

Abstract

The competition between a central securities depository (CSD) and a custodian bank is analysed in a Stackelberg model. The CSD sets its prices first, the custodian bank follows. There are many investor banks each of which has to decide whether to use the service of the CSD or of the custodian bank. This decision depends on the prices and the investor bank's preferences for the inhomogeneous services of the two service providers. Since the custodian bank uses services provided by the CSD as input, the CSD can raise its rival's costs. However, due to network externalities, the CSD's equilibrium market share is not necessarily higher than socially optimal. This result has important policy implications that are related to a discussion currently taking place in the securities settlement industry. JEL Classification: G10, G20, L14

Suggested Citation

  • Holthausen, Cornelia & Tapking, Jens, 2004. "Raising rival's costs in the securities settlement industry," Working Paper Series 376, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2004376
    Note: 253388
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    References listed on IDEAS

    as
    1. 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.
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Giulia Iori & Christophe Deissenberg, 2008. "An Analysis of Settlement Risk Contagion in Alternative Securities Settlement Architectures," Springer Books, in: Erricos J. Kontoghiorghes & Berç Rustem & Peter Winker (ed.), Computational Methods in Financial Engineering, pages 299-315, Springer.
    2. Degryse, H.A. & van Achter, M. & Wuyts, G., 2012. "Internalization, Clearing and Settlement, and Liquidity," Other publications TiSEM 3744cb8d-b4ce-47a1-9abd-f, Tilburg University, School of Economics and Management.
    3. Tapking, Jens, 2007. "Pricing of settlement link services and mergers of central securities depositories," Working Paper Series 710, European Central Bank.
    4. Alexandra Lai & Nikil Chande & Sean O'Connor, 2006. "Credit in a Tiered Payments System," Staff Working Papers 06-36, Bank of Canada.
    5. Steffen Juranek & Uwe Walz, 2020. "Organizational Design, Competition, and Financial Exchanges," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(1), pages 132-163, January.
    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. Sauer, Stephan & Mercier, Fabien, 2013. "Optimal CSD reshaping towards T2S," Working Paper Series 1549, European Central Bank.
    8. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
    9. Iori, Giulia, 2004. "An analysis of systemic risk in alternative securities settlement architectures," Working Paper Series 404, European Central Bank.
    10. Kauko, Karlo, 2007. "Interlinking securities settlement systems: A strategic commitment?," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 2962-2977, October.
    11. Alexandra Lai & Nikil Chande & Sean O'Connor, 2006. "Credit in a Tiered Payments System," Staff Working Papers 06-36, Bank of Canada.
    12. Li, Shaofang & Marinč, Matej, 2016. "Competition in the clearing and settlement industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 40(C), pages 134-162.
    13. Li, Shaofang & Marinč, Matej, 2018. "Economies of scale and scope in financial market infrastructures," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 53(C), pages 17-49.
    14. Droll, Thomas & Podlich, Natalia & Wedow, Michael, 2016. "Out of sight, out of mind? On the risk of sub-custodian structures," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 47-56.
    15. Hans Degryse & Mark Van Achter & Gunther Wuyts, 2022. "Plumbing of Securities Markets: The Impact of Post-trade Fees on Trading and Welfare," Management Science, INFORMS, vol. 68(1), pages 635-653, January.
    16. Jonathan Chiu & Alexandra Lai, 2007. "Modelling Payments Systems: A Review of the Literature," Staff Working Papers 07-28, Bank of Canada.
    17. Juranek, Steffen & Walz, Uwe, 2010. "Vertical integration, competition, and financial exchanges: Is there grain in the silo?," CFS Working Paper Series 2010/22, Center for Financial Studies (CFS).
    18. Frédéric Cherbonnier & Séverine Vandelanoite, 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.
    19. Van Cayseele, Patrick & Wuyts, Christophe, 2007. "Cost efficiency in the European securities settlement and depository industry," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3058-3079, October.
    20. Milne, Alistair, 2007. "The industrial organization of post-trade clearing and settlement," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 2945-2961, October.

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    More about this item

    Keywords

    network competition;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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