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The immediacy implications of exchange organization

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Author Info
James T. Moser

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Abstract

The 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.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-02-09.

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Date of creation: 2002
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Handle: RePEc:fip:fedhwp:wp-02-09

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Related research
Keywords: Stock exchanges ; Stock - Prices;

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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. Merton H. Miller, . "The Future of Futures," CRSP working papers 323, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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  2. Telser, Lester G, 1986. "Futures and Actual Markets: How They Are Related," Journal of Business, University of Chicago Press, vol. 59(2), pages S5-20, April. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. Gennotte, Gerard & Leland, Hayne, 1990. "Market Liquidity, Hedging, and Crashes," American Economic Review, American Economic Association, vol. 80(5), pages 999-1021, December. [Downloadable!] (restricted)
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  6. Naor, P, 1969. "The Regulation of Queue Size by Levying Tolls," Econometrica, Econometric Society, vol. 37(1), pages 15-24, January. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
  8. 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.
  9. 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.
  10. Davidson, Carl, 1988. "Equilibrium in Servicing Industries: An Economic Application of Queuing Theory," Journal of Business, University of Chicago Press, vol. 61(3), pages 347-67, July. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
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Cited by:
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  1. John P Jackson & Mark J Manning, . "Comparing the pre-settlement risk implications of alternative clearing arrangements," Bank of England working papers 321, Bank of England. [Downloadable!]
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