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Are there Economies of Scale in Stock Exchange Activities?

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  • Malkamäki, Markku
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    Abstract

    This is the first paper that examines economies of scale in stock exchanges. The data employed in the study include cost and output statistics for 37 stock exchanges in four continents around the world for the year 1997. I estimate two traditional cost functions and find that ray (overall) scale economies exist only in the very large stock exchanges but that there are significant scale economies with respect to one of the outputs, ie the processing of trades. On the other hand, there are not equally clear scale advantages related to activities involving company-specific information. There are thus opposing forces, some tending to increase standardization and scale and others favouring the continuization of more localized facilities. The outcome of increasing competition may be not be the amalgamation of exchanges but instead the centralization of certain functions, eg the trading function, and continued realization of others on a decentralized basis. There is nonetheless an obvious incentive for closer and deeper cooperation between European stock exchanges.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/9904.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 4/1999.

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    Length: 31 pages
    Date of creation: 31 Mar 1999
    Date of revision:
    Handle: RePEc:hhs:bofrdp:1999_004

    Contact details of provider:
    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Related research

    Keywords: stock exchanges; alliances; economies of scale; technology;

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    References

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    1. Berger, Allen N. & Humphrey, David B., 1997. "Efficiency of financial institutions: International survey and directions for future research," European Journal of Operational Research, Elsevier, vol. 98(2), pages 175-212, April.
    2. Pagano, Marco, 1989. "Trading Volume and Asset Liquidity," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 255-74, May.
    3. Allen N. Berger & Loretta J. Mester, 1997. "Inside the black box: what explains differences in the efficiencies of financial institutions?," Working Papers 97-1, Federal Reserve Bank of Philadelphia.
    4. Gehrig, Thomas, 1998. "Competing markets," European Economic Review, Elsevier, vol. 42(2), pages 277-310, February.
    5. Oliver Hart & John Moore, 1996. "The Governance of Exchanges: Members' Co-operatives Versus Outside Ownership," STICERD - Theoretical Economics Paper Series /1996/292, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    6. Nicholas Economides, . "Network Economics with Application to Finance," Financial Networks _004, Economics of Networks.
    7. Gaspar, Jess & Glaeser, Edward L., 1998. "Information Technology and the Future of Cities," Journal of Urban Economics, Elsevier, vol. 43(1), pages 136-156, January.
    8. Bessembinder, Hendrik & Kaufman, Herbert M., 1997. "A cross-exchange comparison of execution costs and information flow for NYSE-listed stocks," Journal of Financial Economics, Elsevier, vol. 46(3), pages 293-319, December.
    9. James G. MacKinnon & Halbert White, 1983. "Some Heteroskedasticity Consistent Covariance Matrix Estimators with Improved Finite Sample Properties," Working Papers 537, Queen's University, Department of Economics.
    10. 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.
    11. Paul W. Bauer & Diana Hancock, 1995. "Scale economies and technological change in Federal Reserve ACH payment processing," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 14-29.
    12. Gehrig, Thomas, 1998. "Cities and the Geography of Financial Centres," CEPR Discussion Papers 1894, C.E.P.R. Discussion Papers.
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    Cited by:
    1. Jess K.-Y. Lee & Alfred Y.-T. Wong, 2012. "Impact of financial liberalisation on stock market liquidity: experience of China," Journal of Chinese Economic and Foreign Trade Studies, Emerald Group Publishing, vol. 5(1), pages 4-19, February.
    2. Jong-Kun Lee & Biaggio Bossone, 2002. "In Finance, Size Matters," IMF Working Papers 02/113, International Monetary Fund.
    3. de la Torre, Augusto & Gozzi, Juan Carlos & Schmukler, Sergio L., 2007. "Capital market development : whither Latin America ?," Policy Research Working Paper Series 4156, The World Bank.
    4. Schmiedel, Heiko, 2002. "Total factor productivity growth in European stock exchanges: A non-parametric frontier approach," Research Discussion Papers 11/2002, Bank of Finland.
    5. Ben Slimane, FATEN, 2007. "L'Evolution des Marchés Boursiers Européens: Enjeux et limites
      [European Stock Market Evolution]
      ," MPRA Paper 2607, University Library of Munich, Germany.
    6. Malkamäki, Markku & Topi, Jukka, 1999. "Strategic Challenges for Exchanges and Securities Settlement," Research Discussion Papers 21/1999, Bank of Finland.
    7. Augusto de la Torre & Sergio L. Schmukler, 2007. "Emerging Capital Markets and Globalization : The Latin American Experience," World Bank Publications, The World Bank, number 7187, October.

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