Technological development and concentration of stock exchanges in Europe

This paper provides an explanation of technical inefficiencies of financial exchanges in Europe as well as an empirical analysis of their existence and extent. A single-stage stochastic cost frontier approach is employed, which generates exchange inefficiency scores based on a unique unbalanced panel data set for all major European financial exchanges over the period 1985–1999. Overall cost inefficiency scores reveal that European exchanges operate at 20–25% above the efficiency benchmark. The results also affirm that size of exchange; market concentration and quality; structural reorganisations of exchange governance; diversification in trading service activities; and adoption of automated trading systems significantly influence the efficient provision of trading services in Europe. Over the sample period, European exchanges notably improved their ability to efficiently manage their production and input resources.Europe; financial exchanges; panel data; technical efficiency

Total factor productivity growth in European stock exchanges: A non-parametric frontier approach

This paper examines progressive changes in productivity of the European stock exchange industry using non-parametric frontier techniques. Within the framework of Malmquist indices, total factor productivity growth is decomposed into technological progress and technical efficiency change for a balanced panel of all major European stock exchanges over the period 1993–1999. The principal findings indicate an overall rise in productivity over the sample period, which is driven more by technological innovation than by efficiency improvements. According to organisational setup, technological innovation is more pronounced for exchanges with the following characteristics: automation, equity and derivatives trading, for-profit governance structure, large or medium-size capitalised markets. Technological progress can be interpreted as a sign of the dynamic nature of the whole exchange industry, in which stock exchanges take advantage of intense diffusion of new cost-effective technologies and information systems to leverage themselves onto a higher production frontier.stock exchanges; productivity; technological progress; Europe

The economic impact of the Single Euro Payments Area

With the realisation of the Single Euro Payments Area (SEPA), there will be no difference in the euro area between national and cross-border retail payments. SEPA is aimed at fostering competition and innovation, and improving conditions for customers. This requires concerted efforts from various stakeholders, in particular the banking industry, to align national practices. The Eurosystem strongly supports the SEPA project. In its catalyst role, the European Central Bank (ECB) closely monitors and assesses the overall development of SEPA. Against this background, the ECB has carried out in cooperation with the banking industry a SEPA impact study with the aim of enriching its understanding of the potential economic consequences of SEPA. Based on the quantitative and qualitative expectations of major pan-European banks, the study finds that the overall financial impact for the banking industry varies according to different scenarios of the SEPA project. The coexistence of national and SEPA retail payment schemes is expected to lead to initial investments borne by the banks. In the longer term, banks expect to benefit from improved cost efficiency and economies of scale and scope. Furthermore, banks are expected to face downward pressure on their revenues as competition will increase across borders and as a result of new market entrants. The findings of the study confirm the view that a dual SEPA implementation phase should be as short as possible. In fact, a longer migration period would give rise to higher costs than a shorter period. It can furthermore be concluded that those institutions that embrace new technological developments, create new businesses and provide innovative services are likely to gain most from SEPA. JEL Classification: G21, L11, L22.SEPA, European integration, payment systems.

Interchange fees in card payments

The present paper explores issues surrounding multilateral interchange fees (MIFs) in payment card markets from various angles. The Eurosystem’s public stance on interchange fees is neutral. However, the Eurosystem takes a keen interest in facilitating a constructive dialogue among the stakeholders involved in this debate. Transparency and clarity with respect to the real costs and benefi ts of different payment instruments are indispensable for a modern and harmonised European retail payments market. Interchange fees (if any) should be set at a reasonable level so as to promote overall economic effi ciency in compliance with competition rules. JEL Classification: C43, E31interchange fees, retail payment systems, Trade credit and debit cards, two-sided markets

Do networks in the stock exchange industry pay off? European evidence

The economic theory of network externalities provides the rationale for this paper, which investigates whether adoption of network strategies in European stock exchanges creates additional value in the provision of trading services. Using unbalanced panel data from all major European exchanges over the period 1996–2000, the paper examines empirically the presence of network effects on the liquidity, growth, and efficiency of the exchanges; the transaction cost of trades; and the cost of exchange operations. The evidence shows that adopting a network strategy is significantly associated with higher liquidity, growth and efficiency in the sample markets. Moreover, a network strategy helps to reduce transaction costs of trades as well as operational costs for stock exchanges.stock exchanges; network externalities; remote access; Europe

Economies of scale and technological development in securities depository and settlement systems

The paper investigates the existence and extent of economies of scale in depository and settlement systems. Evidence from 16 settlement institutions across different regions for the years 1993–2000 indicates the existence of significant economies of scale. The degree of such economies, however, differs by size of settlement institution and region. While smaller settlement service providers reveal high potential of economies of scale, larger institutions show an increasing trend of cost effectiveness. Clearing and settlement systems in countries in Europe and Asia report substantially larger economies of scale than those of the US system. European cross-border settlement seems to be more cost intensive than that on a domestic level, reflecting chiefly complexities of EU international securities settlement and differences in the scope of international settlement services providers. The evidence also reveals that investments in implementing new systems and upgrades of settlement technology continuously improved cost effectiveness over the sample period.securities settlement, economies of scale, technological progress

Consumer credit and payment cards

We consider debit and credit card networks. Our contribution is to introduce the role of consumer credit into these payment networks, and to assess the way this affects competition and equilibrium fees. We analyze a situation in which overdrafts are associated with current accounts and debit cards, and larger credit lines with ‘grace’ periods are associated with credit cards. If we just introduce credit cards, we find their merchant fees depend not only on the networks’ cost of funds and the probability of default, but also on the interest rates of overdrafts. Whilst debit card merchant fees do not depend on funding costs or default risk in a debit-card only world, this changes when they start to compete with credit cards. First, debit merchant acceptance increases with the default probability, even though merchant fees increase. Second, an increase in funding costs causes a surprising increase in debit merchant fees. Effectively, the bank offering the debit card benefits from consumers maintaining a positive current account balance, when they use their credit instead of their debit card. As a result, this complementarity may lead to relatively high debit card merchant fees as the bank discourages debit card acceptance at the margin. JEL Classification: L11, G21, D53card competition, complementarity, consumer credit, Payment pricing

Growth strategies and value creation: what works best for stock exchanges?

In recent years, demutualized stock exchanges have been increasingly engaging in M&A and alliance activities. To examine the effect of these growth strategies on exchange shareholders’ value creation, we focus on 14 public stock exchanges and investigate their short-run share price responses to the formation of 110 M&As and alliances all over the world spanning the period 2000-2008. Our findings show that the average stock price responses for M&As and alliances are positive. M&As create more value than alliances. For alliances, joint ventures generate more value than non-equity alliances. More value accrues when the integration is horizontal (cross-border) than when it is vertical (domestic). Additionally, there is evidence of learning-by-doing effects in stock exchange integration activities. Finally, we find that the better the shareholder protection, accounting standards and capital market development in the partner exchange’s country, the higher the merger and alliance premium for our sample exchange. These patterns are consistent when we examine the exchanges’ long-run performance. JEL Classification: L22, G32, D23exchanges, joint ventures, mergers and acquisitions, network organization, strategic alliances

Technology, automation, and productivity of stock exchanges: International evidence

The paper stresses on the importance of understanding the operational choices, strategies, and performances of stock exchanges as regular operating firms (Arnold et al (1999), and Pirrong (1999)) Using unbalanced panel data on 49 stock exchanges over the period 1989–1998, the paper traces the productivity of stock exchanges over time and across different types and groups of exchanges. We find significant variability in respect of the productivity – revenue and cost efficiency – across these exchanges. On average, North American exchanges are found to be most cost and revenue efficient. However, our findings also indicate that European exchanges have improved the most, in respect of cost efficiency, while exchanges in South America and Asia-Pacific regions are found to be lagging as regards both cost and revenue estimations. The evidence also indicates that investment in technology-related developments effectively influenced cost and revenue efficiency. Moreover, organisational structure and market competition are found to be significantly associated with both cost and revenue efficiency for the exchanges studied, whereas market size and quality are related only to revenue efficiency.stock exchanges; technological progress; technical efficiency

Economies of scale and technological development in securities depository and settlement systems

The paper investigates the existence and extent of economies of scale in depository and settlement systems. Evidence from 16 settlement institutions across different regions for the years 1993–2000 indicates the existence of significant economies of scale. The degree of such economies, however, differs by size of settlement institution and region. While smaller settlement service providers reveal high potential of economies of scale, larger institutions show an increasing trend of cost effectiveness. Clearing and settlement systems in countries in Europe and Asia report substantially larger economies of scale than those of the US system. European cross-border settlement seems to be more cost intensive than that on a domestic level, reflecting chiefly complexities of EU international securities settlement and differences in the scope of international settlement services providers. The evidence also reveals that investments in implementing new systems and upgrades of settlement technology continuously improved cost effectiveness over the sample period.securities settlement; economies of scale; technological progress