Electronic Derivatives Exchanges: Implicit Mergers, Network Externalities and Standardization
QUARTERLY REVIEW OF ECONOMICS AND FINANCE, Volume 35 Number 2, Summer 1995
Posted: 10 Oct 1998
The economic theory of network externalities is used to explore the possibility of consolidation and growing market power in the exchange-traded derivatives industry. A definition of implicit mergers between exchanges is offered. It is argued that electronic exchange structure will serve as the blind from which multinational mergers between existing exchanges will emerge. Economic equilibrium should entail lower pricing of electronic exchanges services initially, followed by heightened liquidity and above marginal cost pricing later. The latter will be enabled through cartelization and implicit mergers. Evidence isprovided that such merger activity has begun over the past year or so, with "international linkage" as the disguise and electronic trading facilities as the vehicle.
JEL Classification: G10, G15
Suggested Citation: Suggested Citation