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Vertical integration, competition, and financial exchanges: Is there grain in the silo?

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  • Juranek, Steffen
  • Walz, Uwe

Abstract

We investigate the incentives for vertical or horizontal integration in the financial security service industry, consisting of trading, clearing and settlement. We thereby focus on firms' decisions but also look on the implications of these decisions on competition and welfare. Our analysis shows that the incentives for vertical integration crucially depend on industry as well as market characteristics. A more pronounced demand for liquidity clearly favors vertical integration whereas deeper financial integration increases the incentives to undertake vertical integration only if the efficiency gains associated with vertical integration are sufficiently large. Furthermore, we show that market forces can suffer from a coordination problem that end in vertically integrated structures that are not in the best interest of the firms. We believe this problem can be addressed by policy measures such as the TARGET2-Securities program. Furthermore, we use our framework to discuss major industry trends and policy initiatives. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2010/22.

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Date of creation: 2010
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Handle: RePEc:zbw:cfswop:201022

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Related research

Keywords: Vertical Integration; Horizontal Integration; Competition; Trading; Settlement;

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References

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  1. Kauko, Karlo, 2004. "The links between securities settlement systems: An oligopoly theoretic approach," International Review of Financial Analysis, Elsevier, vol. 13(5), pages 585-600.
  2. Terrence Hendershott & Charles M. Jones & Albert J. Menkveld, 2011. "Does Algorithmic Trading Improve Liquidity?," Journal of Finance, American Finance Association, vol. 66(1), pages 1-33, 02.
  3. FOUCAULT, Thierry & PARLOUR, Christine A., 1999. "Competition for Listings," Les Cahiers de Recherche 666, HEC Paris.
  4. Michael Halling & Marco Pagano & Otto Randl & Josef Zechner, 2008. "Where Is the Market? Evidence from Cross-Listings in the United States," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 725-761, April.
  5. Tapking, Jens & Yang, Jing, 2004. "Horizontal and vertical integration and securities trading and settlement," Working Paper Series 0387, European Central Bank.
  6. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  7. Holthausen, Cornelia & Tapking, Jens, 2004. "Raising rival's costs in the securities settlement industry," Working Paper Series 0376, European Central Bank.
  8. Koppl, Thorsten V. & Monnet, Cyril, 2007. "Guess what: It's the settlements! Vertical integration as a barrier to efficient exchange consolidation," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3013-3033, October.
  9. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
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