How and When Do Markets Tip? Lessons from the Battle of the Bund
47 Pages Posted: 28 Jun 2007
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: Suggested Citation
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