Clearing Up Misconceptions on Clearing

7 Pages Posted: 28 Oct 2008

See all articles by Craig Pirrong

Craig Pirrong

University of Houston - Department of Finance

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

Pirrong, Craig, Clearing Up Misconceptions on Clearing (October, 24 2008). Regulation, Vol. 31, No. 3, Fall 2008. Available at SSRN:

Craig Pirrong (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

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