Strategic Challenges for Exchanges and Securities Settlement

38 Pages Posted: 14 Oct 2007

Date Written: December 31, 1999


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.

Keywords: exchanges, settlement systems, technology, network externalities, economies of scale

Suggested Citation

Malkamäki, Markku and Topi, Jukka P., Strategic Challenges for Exchanges and Securities Settlement (December 31, 1999). Bank of Finland Research Discussion Paper No. 21/1999. Available at SSRN: or

Markku Malkamäki

Evli Bank Plc ( email )

Aleksanterinkatu 19 A
FIN-00100 Helsinki

Jukka P. Topi (Contact Author)

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki

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