Clearing Up Misconceptions on Clearing
7 Pages Posted: 28 Oct 2008
Date Written: October, 24 2008
Vertical integration of the execution and clearing of financial trades is an efficiency-improving response to pervasive scale economies. That said, it is highly unlikely that integrated exchanges achieve a first-best, optimal outcome. Because of scale economies, it is very difficult to compete against incumbent exchanges and, as a result, they possess and exercise market power. Serious attempts to undermine exchange market power must involve measures designed to handle the liquidity network effect and constrain the ability of clearers to exploit scale economies and charge supracompetitive prices. This article examines these problems and counsels caution for would-be reformers.
Keywords: clearing, securities, derivatives, finances, financial market, regulation, exchanges, transactions, vertical integration, efficiency
JEL Classification: G00, G10, G13, G14, G18, G20, G21, G28
Suggested Citation: Suggested Citation