2,798 research outputs found

    Strategic Challenges for Exchanges and Securities Settlement

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    A common feature of major trends in securities and derivative markets is that they facilitate cross-border competition between financial institutions and markets. These trends include financial deregulation, technological developments that increase network externalities and the introduction of the single currency in Europe. This paper discusses future prospects for stock and derivative exchanges and securities settlement systems globally in the light of this analytical framework. The increased contestability of the financial markets opens the way for a completely new situation where economies of scale and network effects enable new systems to challenge existing exchanges and settlement systems. This has already led towards more integrated trading and settlement infrastructure via mergers, alliances, links, agreements and other forms of cooperation between existing infrastructure companies. At the same time new electronic communication networks and electronic exchanges operated by members of exchanges or off-exchange companies and Internet brokers have emerged. We expect that economies of scale and scope and network effects will foster global competition. The business conducted by brokers and exchanges will tend to converge, thus posing a major challenge for the management of these businesses. Trading and settlement services for the most liquid global trading products will, we believe, be provided by limited liability companies that employ efficient governance practices. We anticipate that US stock and derivative exchanges will have to adopt fully electronic trading systems. This might lead to intense competition between exchanges in the US and globally. We also anticipate that European alliances will be based on a more efficient operational model than the models proposed so far. An increase in Internet-routed equity and derivative trades will lead to partial fragmentation of liquidity. As technology advances, we expect pooling of liquidity in one of the networks.exchanges; settlement systems; technology; network externalities; economies of scale

    The emergence of electronic communications networks in the U.S. equity markets

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    Recent regulatory and technological changes have spurred the development of automated trading systems known as ECNs, or electronic communications networks. Proponents of the networks contend that ECNs can cut transaction costs, accelerate trade execution, and expand the price information available to investors. While some critics have questioned the effects of the ECNs on market integration, it is clear that the networks are poised to play an increasingly important role in the new electronic environment.Electronic commerce ; Securities

    TRANSPARENCY AND BYPASS IN ELECTRONIC FINANCIAL MARKETS

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    Electronic markets use information technology to disseminate information on prices, quantities, and buyer and supplier identities. In spite of the recognized benefits of electronic markets, increased visibility and transparency may introduce imperfections, and create profitable opportunities to bypass markets that generates the information. In the U.S. securities markets, dissemination of market data has equipped several firms to develop competing, off-exchange trading mechanisms that rely on market price data, but whose transactions bypass the established market. Concern is rising that the growing volume of trading occurring away from the main market may reduce liquidity, and increase transactions costs. A simulation model of securities trading in a continuous auction market (similar to the market structure of the New York Stock Exchange) is used to examine the market quality effects of increasing levels of trading activity through an off-exchange dealer. Market characteristics, such as transactions costs, are measured as off-exchange trading increases from zero percent to 20 percent of the total trading volume. The results indicate that competition from an alternative trading venue reduces some trading costs borne by investors. Contrary to regulatory goals, however, off-market trading expands the role of profit-seeking dealers, and lowers the probability that some investors' orders will execute.Information Systems Working Papers Serie

    E-BUSINESS AND GLOBAL SOURCING – INFERENCES FROM SECURITIES EXCHANGES

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    This paper sets out a conceptual model that describes how the configuration of relevant geographic markets might change as electronic “gateways” or portals challenge conventional markets. It then considers the main conceptual inferences against the experience of securities markets. Consideration of empirical evidence suggests that e-business will lead to expanded geographic markets, although the pace and extent of the expansion might be slower and less dramatic, even in the long- run, than early enthusiasts of e-business may have anticipated.geographic markets, securities markets, e-business

    DEMAND FOR OFF-EXCHANGE TRADING SYSTEMS: TRADING PREFERENCES OF INVESTORS ON THE LONDON STOCK EXCHANGE

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    The London Stock Exchange (LSE) faces rising pressure in its efforts to maintain its position as a favored market of institutional fund managers and professional investors. Customers are satisfied with the current state of the LSE market, but member firms are pricing institutional brokerage and market making services below economic cost. The LSE's position will be significantly damaged when the effective subsidy ends, and commissions and dealing spreads reflect the costs incurred by members firms. Competition in the supply of trading services has increased, and a range of alternative, off-exchange trading systems could draw order flow away from the Exchange market. These trading mechanisms provide order matching, crossing of basket and portfolio trades, and reduce investors' commissions and trading spread costs. Fund managers in the U.S. are using the systems more actively, and the result has been an erosion of the position of the New York Stock Exchange. The LSE's customers are also using an expanding range of portfolio management techniques, many of which require low-cost trading, and do not demand immediate order execution, as traditionally provided by London's market makers. The Exchange needs to respond to the changes in fund managers' demand for trading services, and to the growing competition in the supply of off-exchange trading services. Enhancements to the existing LSE market structure are the best response to these threats.Information Systems Working Papers Serie

    Searching for a new center: U.S. securities markets in transition

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    Technological challenges, governance issues, competitive pressures, and questions about the oversight of trading practices are but a few of the many forces besetting U.S. equity markets. This article outlines some important issues surrounding the evolving structure of the U.S. equity markets and offers some alternative regulatory approaches that might be more consistent with this new competitive environment. ; Crafted more than a quarter-century ago in a time of dominant markets interacting with smaller competitors, the National Market System (NMS) was based on a one-size-fits-all approach in which all trade orders were to be treated equally. Over time, technology has enabled the development of new trading systems and dramatically expanded the number of potential competitors. In addition, the traditional market structure of member-owned cooperatives has given way to corporate ownership, which poses challenges for the self-regulatory structure underlying equity market supervision. ; Within this new environment, how should markets compete, how should they be linked, and how should they be regulated? To address these questions, the author discusses several pressing issues such as price-time priority, liquidity rebates, tape revenue, pricing increments, and access fees as well as more general issues such as the viability of self-regulation. ; The Securities and Exchange Commission’s proposed Regulation NMS is a promising start toward addressing the current market structure’s needs. But the author feels that its changes are piecemeal and do not go deep enough to develop a new vision consistent with the current economic realities of equity markets. Where direction is most needed, she concludes, is at the firm level, where regulation must.

    TRADE EXECUTION COSTS AND THE DISINTERMEDIATION OF TRADING IN A COMPETING DEALER MARKET

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    The growth of alternative trading systems that compete with established stock markets will have profound effects on many securities exchanges and their member firms. New screen-based markets can match buy and sell orders, and confirm trades electronically to the participants. In many cases, investors' orders meet directly in the system without the involvement of a broker or a dealer, saving intermediation costs such as the bid-ask spread and broker commission costs. Competing market makers operating on the London Stock Exchange's SEAQ market system provide an intermediated, "quote-driven" trading mechanism. Nearly all equities trading in London today occurs through SEAQ, but the approaching roll-out of several alternative trading systems will provide investors with new opportunities to trade without market makers. A simulation model of order arrival, information change, and trading in a competing dealer market based on the London Stock Exchange is used to examine the consequences of disintermediated trading systems. The results indicate that trading by market makers at their discretion at "midspread" prices leads to a significant reduction in dealing margins. In two other scenarios, the operation of an alternative, disintermediated order crossing mechanism, reduces market makers' trading volumes and lowers the level of intermediation at some savings to investors. Alternative trading systems reduce transactions costs borne by some traders, but those requiring immediate execution and dealer intermediation may pay more.Information Systems Working Papers Serie

    India's Bond Market-Developments and Challenges Ahead

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    While India boasts a world-class equity market and increasingly important bank assets, its bond market has not kept up. The government bond market remains illiquid. The corporate bond market, in addition, remains restrictive to participants and largely arbitrage-driven. Securitization, which once had the jump on other Asian markets, has failed to take off. To meet the needs of its firms and investors, the bond market must therefore evolve. This will mean creating new market sectors such as exchange-traded interest rate and foreign exchange derivatives contracts. It will mean relaxing exchange restrictions, easing investment mandates on contractual savings institutions, reforming the stamp duty tax, and revamping disclosure requirements for corporate public offers. This paper reviews the development and outlook of the Indian bond market. It looks at the market participants-including life insurance, pension funds, mutual funds and foreign investors-and it discusses the importance to development of learning from the innovations and experiences of others.India; emerging East Asia; bond market; securitization; collateralized borrowing and lending obligations (CBLO)

    IntegraciĂłn de mercados financieros regionales: aprender de la experiencia europea

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    (Disponible en idioma inglĂ©s Ășnicamente) El llamado modelo europeo de integraciĂłn de mercados ha venido evolucionando a lo largo de muchas dĂ©cadas. En particular, el plan original de integrar econĂłmicamente a Europa por la vĂ­a de un programa progresivo de harmonizaciĂłn de legislaciones nacionales, especialmente en el campo de los mercados financieros, ha cedido a una alternativa radical basada en el reconocimiento mutuo de los estados miembros de la legislaciĂłn y la normativa nacional en vigor. Dado que ese cambio se puso en marcha mĂĄs que nada por motivos pragmĂĄticos, el enfoque de reconocimiento mutuo ha adquirido desde entonces una dimensiĂłn ideolĂłgica y estratĂ©gica en las negociaciones polĂ­ticas que le confiere aĂșn mĂĄs importancia al estudio de sus repercusiones en el terreno.

    ELECTRONIC TRADING SYSTEMS: STRATEGIC IMPLICATIONS OF MARKET DESIGN CHOICES

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    Modern financial markets compete aggressively for trading activity and investor interest. Information technology, once a crucial element in streamlining paper flows and operations, is now a strategic resource used in attracting or retaining market liquidity. Established exchanges introduce technology to enhance their markets. New market venues challenge the status quo and rely on technology to offer diverse services to increasingly sophisticated investors. In this paper, we examine the strategic design decisions embedded in these new electronic trading systems. Design decisions are critical, as they determine the market microstructure which influences investing strategies, patterns of trade, liquidity and volatility. We propose a taxonomy of design alternatives based on six major dimensions: market structure, type of orders, order execution priority rules, price discovery rules, time stamping, and transparency. Using examples of existing systems, we discuss the potential impact of the various alternatives on the eventual attractiveness of the market to the investors.Information Systems Working Papers Serie
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