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The Immediacy Implications of Exchange Orgzanization

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  • James T. Moser

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.

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File URL: http://fic.wharton.upenn.edu/fic/papers/02/0211.pdf
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Bibliographic Info

Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 02-11.

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Date of creation: Jan 2002
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Handle: RePEc:wop:pennin:02-11

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  1. 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.
  2. 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.
  3. Miller, Merton H., 1997. "The future of futures," Pacific-Basin Finance Journal, Elsevier, vol. 5(2), pages 131-142, June.
  4. 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.
  5. Gerard Gennotte and Hayne Leland., 1989. "Market Liquidity, Hedging and Crashes," Research Program in Finance Working Papers RPF-192, University of California at Berkeley.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. Naor, P, 1969. "The Regulation of Queue Size by Levying Tolls," Econometrica, Econometric Society, vol. 37(1), pages 15-24, January.
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Cited by:
  1. Galbiati, Marco & Soramäki, Kimmo, 2012. "Clearing networks," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 609-626.
  2. Galbiati, Marco & Soramaki, Kimmo, 2013. "Central counterparties and the topology of clearing networks," Bank of England working papers 480, Bank of England.
  3. 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.

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