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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.

Suggested Citation

  • James T. Moser, 2002. "The Immediacy Implications of Exchange Orgzanization," Center for Financial Institutions Working Papers 02-11, Wharton School Center for Financial Institutions, University of Pennsylvania.
    • Handle: RePEc:wop:pennin:02-11
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    File URL: http://fic.wharton.upenn.edu/fic/papers/02/0211.pdf
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    Cited by:

    1. 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.
    2. Marco Galbiati & Kimmo Soramaki, 2013. "Central counterparties and the topology of clearing networks," Bank of England working papers 480, Bank of England.
    3. Galbiati, Marco & Soramäki, Kimmo, 2012. "Clearing networks," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 609-626.

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