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Competition between Exchanges: Lessons from the Battle of the Bund

  • Cantillon, Estelle
  • Yin, Pai-Ling

In a famous episode of financial history which lasted over eight years, the market for the future on the Bund moved entirely from LIFFE, the incumbent London-based derivatives exchange, to DTB, the entering Frankfurt-based exchange. This paper studies the determinants of traders' exchange choice, using a novel panel dataset that contains individual trading firms' membership status at each exchange together with other firms characteristics and pricing, marketing and product portfolio strategies by each exchange. Our data allows us to evaluate different sources of heterogeneity among trading firms and thus distinguish between different explanations for the observed phenomenon. The story the data tells is one of horizontal differentiation and vertical differentiation through liquidity. As a result, DTB attracted a different set of traders than LIFFE, and those traders contributed to the market share reversal.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6923.

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Date of creation: Jul 2008
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Handle: RePEc:cpr:ceprdp:6923
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  1. Arthur, W Brian, 1989. "Competing Technologies, Increasing Returns, and Lock-In by Historical Events," Economic Journal, Royal Economic Society, vol. 99(394), pages 116-31, March.
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