Competition Between Exchanges: Lessons from the Battle of the Bund

58 Pages Posted: 2 Dec 2008  

Estelle Cantillon

Free University of Brussels (VUB/ULB) - ECARES; Centre for Economic Policy Research (CEPR)

Pai-Ling Yin

Marshall School of Business, University of Southern California

Date Written: July 2008

Abstract

In a famous episode of financial history which lasted over eight years, the market for the future on the Bund moved entirely from LIFFE, the incumbent London-based derivatives exchange, to DTB, the entering Frankfurt-based exchange. This paper studies the determinants of traders' exchange choice, 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 evaluate different sources of heterogeneity among trading firms and thus distinguish between different explanations for the observed phenomenon. The story the data tells is one of horizontal differentiation and vertical differentiation through liquidity. As a result, DTB attracted a different set of traders than LIFFE, and those traders contributed to the market share reversal.

Keywords: intermediation, multi-homing, network effects, platform competition, tipping

JEL Classification: D4

Suggested Citation

Cantillon, Estelle and Yin, Pai-Ling, Competition Between Exchanges: Lessons from the Battle of the Bund (July 2008). CEPR Discussion Paper No. DP6923. Available at SSRN: https://ssrn.com/abstract=1307513

Estelle Cantillon (Contact Author)

Free University of Brussels (VUB/ULB) - ECARES ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
B-1050 Brussels
Belgium
+32 2 650 3840 (Phone)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Pai-Ling Yin

Marshall School of Business, University of Southern California ( email )

United States

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