How and When Do Markets Tip? Lessons from the Battle of the Bund

47 Pages Posted: 28 Jun 2007

See all articles by Estelle Cantillon

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: June 2007

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, a London-based derivatives exchange, to DTB, a Frankfurt-based exchange. This paper studies the determinants of the observed dynamics, 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 distinguish between different explanations for the observed phenomenon. Our results indicate that the main driver was a market coverage effect: thanks to the combination its electronic market structure and EU-wide access deregulation, DTB increased the relevant size of the market for exchange members and disproportionately attracted those firms who originally did not exist or used to submit their orders through a broker. Differential liquidity and product portfolio strategies by the exchanges played a secondary role.

Keywords: Exchange competition, tipping, electronic trading, open outcry, network effect, Bund, adoption cost

JEL Classification: G21, G28, L13, L43

Suggested Citation

Cantillon, Estelle and Yin, Pai-Ling, How and When Do Markets Tip? Lessons from the Battle of the Bund (June 2007). ECB Working Paper No. 766. Available at SSRN: https://ssrn.com/abstract=989996

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)

London
United Kingdom

Pai-Ling Yin

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

United States

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