Securities Market Macrostructure: Property Rights and the Efficiency of Securities Trading

Posted: 30 Jun 2002

See all articles by Craig Pirrong

Craig Pirrong

University of Houston - Department of Finance

Abstract

This article derive securities market macrostructure from microstructural foundations under a variety of assumptions regarding property rights. Because liquidity effectively makes securities trading a network industry, intermediaries can exercise market power by restricting access to the trading mechanism. Fragmentation, cream skimming and free riding reduce the inefficiency that results from this market power, but welfare would be improved further by requiring open access to all trading venues. Implementing open access in practice must confront a trade-off between reducing market power and potentially impairing the incentives of the operators of trading systems to reduce cost and improve quality. Other network industries, notably telecoms and electricity transmission, have faced similar dilemmas, and the path to the creation of a more efficient property rights structure in financial markets could benefit from the experiences of other network markets.

Keywords: securities market structure, financial exchanges

JEL Classification: L11, L12, L31, G10, G20

Suggested Citation

Pirrong, Craig, Securities Market Macrostructure: Property Rights and the Efficiency of Securities Trading. The Journal of Law, Economics, and Organization, Vol. 18, No. 2, pp. 385-410, 2002. Available at SSRN: https://ssrn.com/abstract=311389

Craig Pirrong (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

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