Institutional developments in the globalization of securities and futures markets

Futures ; International finance

The structure of derivatives exchanges : lessons from developed and emerging markets

The authors examine the architecture, elements of market design, and the products traded in derivatives exchanges around the world. The core function of a derivatives exchange is to facilitate the transfer of risk among economic agents by providing mechanisms to enhance liquidity and facilitate price discovery. They test the proposition that organizational arrangements necessary to perform this function are not the same across markets. They also examine the sequencing of products introduced in derivatives exchanges. Using a survey instrument, they find that: a) Financial systems perform the same core functions across time and place but institutional arrangements differ. b) The ownership structure of derivatives exchanges assumes different forms across markets. c) The success of an exchange depends on the structure adopted and the products traded. d) Exchanges are regulated directly or indirectly through a government law. In addition, exchanges have their own regulatory structure. e) Typically (but not always) market-making systems are based on open outcry, with daily mark-to-market and gross margining -- but electronic systems are gaining popularity. f) Several (but not all) exchanges own clearing facilities and use netting settlement procedures. As for derivative products traded, they find that: i) Although most of the older exchanges started with (mainly agricultural) commodity derivatives, newer exchanges first introduce financial derivative products. ii) Derivatives based on a domestic stock index have greater potential for success followed by derivatives based on local interest rates and currencies. iii) The introduction of derivatives contracts appears to take more time in emerging markets compared with developed markets, with the exception of index products.Economic Theory&Research,Payment Systems&Infrastructure,International Terrorism&Counterterrorism,Non Bank Financial Institutions,Environmental Economics&Policies,International Terrorism&Counterterrorism,Payment Systems&Infrastructure,Economic Theory&Research,Non Bank Financial Institutions,Environmental Economics&Policies

How and when do markets tip? Lessons from the Battle of the Bund

In a famous episode of financial history which lasted over eight years, the market for the future on the Bund moved entirely from LIFFE, a London-based derivatives exchange, to DTB, a Frankfurt-based exchange. This paper studies the determinants of the observed dynamics, 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 distinguish between different explanations for the observed phenomenon. Our results indicate that the main driver was a "market coverage" effect: thanks to the combination its electronic market structure and EU-wide access deregulation, DTB increased the relevant size of the market for exchange members and disproportionately attracted those firms who originally did not exist or used to submit their orders through a broker. Differential liquidity and product portfolio strategies by the exchanges played a secondary role. JEL Classification: G21, G28, L13, L43adoption cost, Bund, electronic trading, Exchange competition, network effect, open outcry, tipping

ELECTRONIC MARKETS AND FLOOR MARKETS: COMPETITION FOR TRADING VOLUMES IN FUTURES AND OPTIONS EXCHANGES

The internationalization of financial markets and the increasing demand for risk management products have fueled the growth of derivatives markets. While most exchanges have experienced increasing volumes over recent years, the pace of growth varies widely across exchanges, and the established marketplaces face increasing competitive pressures. In this paper, we investigate whether the trading mechanism offered to derivatives investors influences growth in market volumes. In particular, we distinguish between manual open outcry and electronic trading. In a floor market, traders gather in a pit and announce their orders. They complete trades using a combination of hand signals and eye contact. In an electronic market, orders are submitted to a central order book, and trades are created according to a matching algorithm. Using volume data from 1990-1994 for futures and options exchanges worldwide, we compute growth rates for the largest contracts and find that contracts traded in screen-based exchanges have experienced faster growth than those traded in manual markets. We discuss several interpretations of the data, but conclude that electronic exchanges are developing a competitive advantage.Information Systems Working Papers Serie

Introducing contemporaneous open-outcry and e-trading at the Chicago Board of Trade

This study uses a vector error correction (VEC) model to examine price-volume relationships between open outcry and e-trading at the Chicago Board of Trade. We test whether equilibrium price corrections on one system are independent of the other, and whether this price behavior is more sensitive to changes in screen-based volume as opposed to open outcry volume. Error correction terms capture an asymmetric price adjustment process led by open outcry trading. Open outcry volume (market depth) also results in price discovery by dampening price volatility on both markets. These aspects of market microstructure are relevant in identifying how newly introduced e-trading systems operate in relation to established open outcry systems,and how e-trading systems may affect the economic performance of futures exchanges generally.market liquidity; e-trading; vector error correction model

ELECTRONIC MARKETS AND FLOOR MARKETS: COMPETITION FOR TRADING VOLUMES IN FUTURES AND OPTIONS EXCHANGES

The internationalization of financial markets and the increasing demand for risk management products have fueled the growth of derivatives markets. While most exchanges have experienced increasing volumes over recent years, the pace of growth varies widely across exchanges, and the established marketplaces face increasing competitive pressures. In this paper, we investigate whether the trading mechanism offered to derivatives investors influences growth in market volumes. In particular, we distinguish between manual open outcry and electronic trading. In a floor market, traders gather in a pit and announce their orders. They complete trades using a combination of hand signals and eye contact. In an electronic market, orders are submitted to a central order book, and trades are created according to a matching algorithm. Using volume data from 1990-1994 for futures and options exchanges worldwide, we compute growth rates for the largest contracts and find that contracts traded in screen-based exchanges have experienced faster growth than those traded in manual markets. We discuss several interpretations of the data, but conclude that electronic exchanges are developing a competitive advantage.Information Systems Working Papers Serie

Stock exchanges and regional competitiveness: the case of small German exchanges

The analysis of financial centers focuses mainly on the competition between and changing roles of the major places. In the European context thus usually London, Paris, Frankfurt/Main and other national financial centers have become objects of investigation. The findings show that the recent reorganisation of financial centers in Europe under the conditions of widespread use of ICT with the possibility of remote access to exchanges, the development of innovative products on financial markets, and the advent of a single currency affects structures, organisation and specialization of the main actors within financial centers, i.e. banks and exchanges. The planned but failed merger between London Stock Exchange and Deutsche Börse AG in Frankfurt/Main in 2000 has probably been one of the publicly most noticed aspects of this development. The proposed paper wants to put a focus on less prominent features of current restructuring, namely the roles and strategies of minor German exchanges. The main idea is, that - although financial services are characterized by a spread of "de-spatialized" forms of service production-, strategies of regional development based (at least partly) on endogenous resources can be supported by regional financial institutions. The argument will be presented in three steps: At first the importance of a regional exchange for regional development has to be discussed on a theoretical base. This part will draw upon notions and considerations of the "glocalization" literature which stresses the ambivalent relationship between processes of globalization and disembedding on the one hand and re-interpretation of different forms of proximity (including spatial proximity) on the other hand. A second - also rather theoretical - part will consider the possible comparative advantages of minor exchanges in the context of the prevailing concentration processes. This section will therefore focus on possible strategies, which combine the access to highly liquid and innovative exchanges and the special regional knowledge available at regional institutions. The chances and risks of different strategies (alliances with strong national and/or international partners vs. "niche production") have to be discussed. In the third section the empirical findings of the analysis of different minor German exchanges situated in metropolitan regions (Berlin, Hamburg, Munich) will be presented and assessed according to the arguments developed in the preceeding parts. The contextualization not only in respect to the specific regional economic situation but also in respect to the history of the German decentralized system of exchanges and the main trends of restructuring of the "European exchange landscape" will be essential to this last part.