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Competition between Exchanges: Lessons from the Battle of the Bund

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  • Cantillon, Estelle
  • Yin, Pai-Ling

Abstract

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.

Suggested Citation

  • Cantillon, Estelle & Yin, Pai-Ling, 2008. "Competition between Exchanges: Lessons from the Battle of the Bund," CEPR Discussion Papers 6923, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6923
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jean-Edouard Colliard & Thierry Foucault, 2012. "Trading Fees and Efficiency in Limit Order Markets," Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3389-3421.
    2. Eichengreen, Barry & Lafarguette, Romain & Mehl, Arnaud, 2016. "Cables, Sharks and Servers: Technology and the Geography of the Foreign Exchange Market," CEPR Discussion Papers 11053, C.E.P.R. Discussion Papers.
    3. Henk Berkman & Carole Comerton‐Forde, 2011. "Market microstructure: A review from down under," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 51(1), pages 50-78, March.
    4. Ginger Zhe Jin & Marc Rysman, 2015. "Platform Pricing at Sports Card Conventions," Journal of Industrial Economics, Wiley Blackwell, vol. 63(4), pages 704-735, December.
    5. Morgan, John & Hossain, Tanjim & Minor, Dylan, 2009. "Do All Markets Ultimately Tip? Experimental Evidence," Department of Economics, Working Paper Series qt4nw230qt, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    6. Alexander White & E. Glen Weyl, 2010. "Imperfect Platform Competition: A General Framework," Working Papers 10-17, NET Institute, revised Nov 2010.
    7. Kei Kawakami, 2013. "Optimal Market Size," Department of Economics - Working Papers Series 1168, The University of Melbourne.
    8. Cantillon, Estelle & Yin, Pai-Ling, 2011. "Competition between exchanges: A research agenda," International Journal of Industrial Organization, Elsevier, vol. 29(3), pages 329-336, May.
    9. Michal Grajek & Tobias Kretschmer, 2008. "Estimating critical mass in the global cellular telephony market," ESMT Research Working Papers ESMT-08-004 (R1), ESMT European School of Management and Technology, revised 15 Apr 2010.
    10. Andre Veiga & E. Glen Weyl, 2011. "Multidimensional Heterogeneity and Platform Design," Working Papers 11-33, NET Institute, revised Nov 2011.
    11. Grajek, Michał & Kretschmer, Tobias, 2012. "Identifying critical mass in the global cellular telephony market," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 496-507.
    12. Estelle Cantillon & Pai-Ling Yin, 2008. "Asymmetric Network Effects," Working Papers 08-42, NET Institute.

    More about this item

    Keywords

    intermediation; multi-homing; network effects; platform competition; tipping;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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