Organizational Design, Competition, and Financial Exchanges

Juranek, Steffen; Walz, Uwe

doi:10.2139/ssrn.1730152

Organizational Design, Competition, and Financial Exchanges

24 Pages Posted: 26 Dec 2010 Last revised: 11 Jun 2014

See all articles by Steffen Juranek

Steffen Juranek

Norwegian School of Economics (NHH) - Department of Business and Management Science

Uwe Walz

Goethe University Frankfurt - Institute of Economics; Center For Financial Studies (CFS); Leibniz Institute for Financial Research SAFE

Date Written: May 25, 2014

Abstract

We investigate the incentives for vertical and horizontal integration in the financial securities service industry. Our analysis shows that the incentives for vertical integration depend on industry characteristics revealing, for example, that incentives increase in the demand for liquidity. Decentralized decisions might lead to an industry equilibrium with lower aggregate profits for all participants. This problem can be overcome by horizontal integration. We link our results to recent regulatory and institutional developments, and argue that multilateral trading facilities and algorithmic trading lead to lower incentives for vertical integration whereas the regulatory push towards mandatory clearing of over-the-counter trades increases the profitability of vertical integration.

Keywords: Vertical Integration, Horizontal Integration, Competition, Trading, Settlement

JEL Classification: G15, L13, L22

Suggested Citation: Suggested Citation

Juranek, Steffen and Walz, Uwe, Organizational Design, Competition, and Financial Exchanges (May 25, 2014). Available at SSRN: https://ssrn.com/abstract=1730152 or http://dx.doi.org/10.2139/ssrn.1730152