The Immediacy Implications of Exchange Orgzanization
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.
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Bibliographic InfoPaper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 02-11.
Date of creation: Jan 2002
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Other versions of this item:
- James T. Moser, 2002. "The immediacy implications of exchange organization," Working Paper Series WP-02-09, Federal Reserve Bank of Chicago.
- NEP-ALL-2002-04-15 (All new papers)
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