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Strategic Challenges for Exchanges and Securities Settlement

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  • Malkamäki, Markku
  • Topi, Jukka

    ()
    (Bank of Finland Research)

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    Abstract

    A common feature of major trends in securities and derivative markets is that they facilitate cross-border competition between financial institutions and markets. These trends include financial deregulation, technological developments that increase network externalities and the introduction of the single currency in Europe. This paper discusses future prospects for stock and derivative exchanges and securities settlement systems globally in the light of this analytical framework. The increased contestability of the financial markets opens the way for a completely new situation where economies of scale and network effects enable new systems to challenge existing exchanges and settlement systems. This has already led towards more integrated trading and settlement infrastructure via mergers, alliances, links, agreements and other forms of cooperation between existing infrastructure companies. At the same time new electronic communication networks and electronic exchanges operated by members of exchanges or off-exchange companies and Internet brokers have emerged. We expect that economies of scale and scope and network effects will foster global competition. The business conducted by brokers and exchanges will tend to converge, thus posing a major challenge for the management of these businesses. Trading and settlement services for the most liquid global trading products will, we believe, be provided by limited liability companies that employ efficient governance practices. We anticipate that US stock and derivative exchanges will have to adopt fully electronic trading systems. This might lead to intense competition between exchanges in the US and globally. We also anticipate that European alliances will be based on a more efficient operational model than the models proposed so far. An increase in Internet-routed equity and derivative trades will lead to partial fragmentation of liquidity. As technology advances, we expect pooling of liquidity in one of the networks.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/9921.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 21/1999.

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    Length: 38 pages
    Date of creation: 31 Dec 1999
    Date of revision:
    Handle: RePEc:hhs:bofrdp:1999_021

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    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: exchanges; settlement systems; technology; network externalities; economies of scale;

    References

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    1. Jess Gaspar & Edward L. Glaeser, 1996. "Information Technology and the Future of Cities," Harvard Institute of Economic Research Working Papers 1756, Harvard - Institute of Economic Research.
    2. 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.
    3. 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.
    4. Malkamäki, Markku, 1999. "Are there Economies of Scale in Stock Exchange Activities?," Research Discussion Papers 4/1999, Bank of Finland.
    5. Robert N. McCauley & William R. White, 1997. "The Euro and European financial markets," BIS Working Papers 41, Bank for International Settlements.
    6. 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.
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    Cited by:
    1. Hasan, Iftekhar & Malkamäki, Markku, 2000. "Are Expansions Cost Effective for Stock Exchanges? A Global Perspective," Research Discussion Papers 20/2000, Bank of Finland.
    2. Schmiedel, Heiko, 2002. "Total factor productivity growth in European stock exchanges: A non-parametric frontier approach," Research Discussion Papers 11/2002, Bank of Finland.
    3. Hasan, Iftekhar & Malkamaki, Markku & Schmiedel, Heiko, 2003. "Technology, automation, and productivity of stock exchanges: International evidence," Journal of Banking & Finance, Elsevier, vol. 27(9), pages 1743-1773, September.
    4. Onder Buberkoku, 2013. "The Relationship Between Stock Prices and Exchange Rates Evidence from Developed and Developing Countries," Istanbul Stock Exchange Review, Research and Business Development Department, Borsa Istanbul, vol. 13(52), pages 1-16, April.
    5. Leinonen, Harry, 2003. "Restructuring securities systems processing – a blue print proposal for real-time/t+0 processing," Research Discussion Papers 7/2003, Bank of Finland.
    6. Martin Gisiger & Werner Weber, 2005. "Switzerland's Financial Infrastructure: Today and Tomorrow," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 74(4), pages 51-62.

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