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How and when do markets tip? Lessons from the Battle of the Bund

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Author Info
Estelle Cantillon () (FNRS, ECARES and CEPR, Université Libre de Bruxelles, CP 114, 50, Avenue F.D. Roosevelt, 1050 Brussels, Belgium.)
Pai-Ling Yin () (Harvard Business School, Soldiers Field Boston, Massachusetts 02163, USA.)

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Abstract

In a famous episode of financial history which lasted over eight years, the market for the future on the Bund moved entirely from LIFFE, a London-based derivatives exchange, to DTB, a Frankfurt-based exchange. This paper studies the determinants of the observed dynamics, using a novel panel dataset that contains individual trading firms'membership status at each exchange together with other firms characteristics, and pricing, marketing and product portfolio strategies by each exchange. Our data allows us to distinguish between different explanations for the observed phenomenon. Our results indicate that the main driver was a "market coverage" effect: thanks to the combination its electronic market structure and EU-wide access deregulation, DTB increased the relevant size of the market for exchange members and disproportionately attracted those firms who originally did not exist or used to submit their orders through a broker. Differential liquidity and product portfolio strategies by the exchanges played a secondary role. JEL Classification: G21, G28, L13, L43.

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Paper provided by European Central Bank in its series Working Paper Series with number 766.

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Length: 45 pages
Date of creation: Jun 2007
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Handle: RePEc:ecb:ecbwps:20070766

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Related research
Keywords: Exchange competition; tipping; electronic trading; open outcry; network effect; Bund; adoption cost.;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Francis Breedon & Allison Holland, . "Electronic versus open outcry markets: The case of the Bund futures contract," Bank of England working papers 76, Bank of England. [Downloadable!]
  2. David Revelt & Kenneth Train, 1998. "Mixed Logit With Repeated Choices: Households' Choices Of Appliance Efficiency Level," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 647-657, November. [Downloadable!] (restricted)
  3. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August. [Downloadable!] (restricted)
  4. Geweke, John F. & Keane, Michael P. & Runkle, David E., 1997. "Statistical inference in the multinomial multiperiod probit model," Journal of Econometrics, Elsevier, vol. 80(1), pages 125-165, September. [Downloadable!] (restricted)
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  5. Emmanuelle Auriol & Michel Benaim, 2000. "Standardization in Decentralized Economies," American Economic Review, American Economic Association, vol. 90(3), pages 550-570, June. [Downloadable!] (restricted)
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  6. Chamberlain, Gary, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Blackwell Publishing, vol. 47(1), pages 225-38, January. [Downloadable!] (restricted)
  7. Brock, William A & Durlauf, Steven N, 2001. "Discrete Choice with Social Interactions," Review of Economic Studies, Blackwell Publishing, vol. 68(2), pages 235-60, April.
  8. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, Elsevier. [Downloadable!] (restricted)
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  9. Economides, Nicholas & Siow, Aloysius, 1988. "The Division of Markets is Limited by the Extent of Liquidity (Spatial Competition with Externalities)," American Economic Review, American Economic Association, vol. 78(1), pages 108-21, March. [Downloadable!] (restricted)
  10. Joseph Farrell & Garth Saloner, 1985. "Installed Base and Compatibility With Implications for Product Preannouncements," Working papers 385, Massachusetts Institute of Technology (MIT), Department of Economics.
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  11. Pagano, Marco, 1989. "Trading Volume and Asset Liquidity," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 255-74, May. [Downloadable!] (restricted)
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  12. Andre de Palma & Luc Leruth, 1989. "Equilibrium in Competing Networks with Differentiated Products," Discussion Papers 814, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  1. Nikolaus Siegfried & Emilia Simeonova & Cristina Vespro, 2007. "Choice of currency in bond issuance and the international role of currencies," Working Paper Series 814, European Central Bank. [Downloadable!]
  2. Jiri Podpiera, 2007. "Policy rate decisions and unbiased parameter estimation in typical monetary policy rules," Working Paper Series 771, European Central Bank. [Downloadable!]
  3. Giovanni Lombardo & David Vestin, 2007. "Welfare implications of Calvo vs. Rotemberg pricing assumptions," Working Paper Series 770, European Central Bank. [Downloadable!]
    Other versions:
  4. Antje Berndt & Iulian Obreja, 2007. "The pricing of risk in European credit and corporate bond markets," Working Paper Series 805, European Central Bank. [Downloadable!]
  5. Igal Hendel & Aviv Nevo & François Ortalo-Magné, 2007. "The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com," NBER Working Papers 13360, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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