A Theory of Financial Exchange Organization

Posted: 10 Jul 2000

See all articles by Craig Pirrong

Craig Pirrong

University of Houston - Department of Finance

Abstract

Although there has been extensive research on the economic functions of financial exchanges and the properties of prices determined on exchanges, there has been little research on their organization and governance. The heterogeneity of the suppliers of financial services who are members of financial exchanges explains salient features of exhange organization. When suppliers of financial services are heterogeneous, one expects to observe exchanges organized as not-for-profit firms, especially if an exchange can enforce collusive agreements. Moreover, heterogeneity can lead to conflicts between members over rents, which necessitates the creation of formal governance mechanisms. Finally, if exchanges exercise market power or are protected from competitive entry (as is plausible), exchanges may adopt inefficient rules; the efficiency of exchange rules depends on the degree of member heterogeneity, the distibutive consequences of these rules, and the ability of exhange governance structures to enforce wealth-enhancing bargains among members with disparate interests.

JEL Classification: G21, G34

Suggested Citation

Pirrong, Craig, A Theory of Financial Exchange Organization. Journal of Law and Economics, Vol. 43, No. 2, October 2000. Available at SSRN: https://ssrn.com/abstract=231756

Craig Pirrong (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
1,019
PlumX Metrics