The immediacy implications of exchange organization
AbstractThe paper introduces a connection between the needs of exchanges to respond to the immediacy needs of their clientele and the need to manage the credit risks faced by exchange members. Queueing theory is used to represent the opportunity loss suffered by brokers engaging in multiple activities: order-flow origination and its intermediation. The role of market-making locals is depicted as enabling specialization. Brokers focus on originating order flow and locals on fulfilling intermediation needs. The capacity to specialize is constrained by the availability of creditworthy members acting as locals. This results in a tension between pursuit of immediacy and managing inter-member credit exposure. Two exchange rules, tick size and price limits, are evaluated for their effects in resolving this tension. This research benefits from the comments of Ray DeGennaro, Mark Flannery, Steve Kane, Tom Lindley, Jay Marchand, Pat Parkinson, Asani Sarkar, Lester Telser, Rich Tsuhara and participants of the Brookings-Wharton Financial Services Conference (January, 2002). Errors remaining in this draft are mine. The views of the paper do not reflect the official positions of the Federal Reserve.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-02-09.
Date of creation: 2002
Date of revision:
Contact details of provider:
Postal: P.O. Box 834, 230 South LaSalle Street, Chicago, Illinois 60690-0834
Web page: http://www.chicagofed.org/
More information through EDIRC
Other versions of this item:
- James T. Moser, 2002. "The Immediacy Implications of Exchange Orgzanization," Center for Financial Institutions Working Papers 02-11, Wharton School Center for Financial Institutions, University of Pennsylvania.
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.:
- Telser, Lester G, 1986. "Futures and Actual Markets: How They Are Related," The Journal of Business, University of Chicago Press, vol. 59(2), pages S5-20, April.
- Frech, H E, III & Lee, William C, 1987. "The Welfare Cost of Rationing-by-Queuing across Markets: Theory and Estimates from the U.S. Gasoline Crises," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 97-108, February.
- Merton H. Miller & Daniel Orr, 1968. "The Demand For Money By Firms: Extensions Of Analytic Results," Journal of Finance, American Finance Association, vol. 23(5), pages 735-759, December.
- Merton H. Miller, .
"The Future of Futures,"
CRSP working papers
323, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Naor, P, 1969. "The Regulation of Queue Size by Levying Tolls," Econometrica, Econometric Society, vol. 37(1), pages 15-24, January.
- Silber, William L, 1984. " Marketmaker Behavior in an Auction Market: An Analysis of Scalpers in Futures Markets," Journal of Finance, American Finance Association, vol. 39(4), pages 937-53, September.
- Gerard Gennotte and Hayne Leland., 1989.
"Market Liquidity, Hedging and Crashes,"
Research Program in Finance Working Papers
RPF-184, University of California at Berkeley.
- Herbert L. Baer & Virginia G. France & James T. Moser, 2001. "Opportunity cost and prudentiality: an analysis of collateral decisions in bilateral and multilateral settings," Working Paper Series WP-01-26, Federal Reserve Bank of Chicago.
- James T. Moser, 1994. "Origins of the modern exchange clearinghouse: a history of early clearing and settlement methods at futures exchanges," Working Paper Series, Issues in Financial Regulation 94-3, Federal Reserve Bank of Chicago.
- De Vany, Arthur S & Saving, Thomas R, 1977. "Product Quality, Uncertainty, and Regulation: The Trucking Industry," American Economic Review, American Economic Association, vol. 67(4), pages 583-94, September.
- De Vany, Arthur S, 1976. "Uncertainty, Waiting Time, and Capacity Utilization: A Stochastic Theory of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 523-41, June.
- Davidson, Carl, 1988. "Equilibrium in Servicing Industries: An Economic Application of Queuing Theory," The Journal of Business, University of Chicago Press, vol. 61(3), pages 347-67, July.
- Galbiati, Marco & Soramaki, Kimmo, 2013. "Central counterparties and the topology of clearing networks," Bank of England working papers 480, Bank of England.
- Galbiati, Marco & Soramäki, Kimmo, 2012. "Clearing networks," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 609-626.
- John P Jackson & Mark J Manning, 2007. "Comparing the pre-settlement risk implications of alternative clearing arrangements," Bank of England working papers 321, Bank of England.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bernie Flores).
If references are entirely missing, you can add them using this form.