Abstract
In the past years equity exchanges have diversified their operations into business areas such as derivatives trading, post-trading services, and software sales. Securities trading and post-trading are subject to economies of scale and scope. The integration of these functions into one institution ensures efficiency by economising on transactions costs. Using balanced panel data from major equity exchanges over the period 2005–2008, we empirically analyse the effects of different business strategies on the costs per trade and the profitability of equity exchanges. The evidence confirms the existence of significant economies of scale. The evidence also shows that vertical integration increases the profitability of exchanges while diversification and horizontal integration reduces their profitability. Naturally, the increasing competition needs to be considered when analysing effects on profitability.
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Notes
Euronext merged the former national exchanges of Belgium, France, Netherlands, and Portugal. OMX merged seven exchanges based in the Scandinavian and Baltic countries.
Being responsible for issues of regulation and competition in the European financial market (for details see http://ec.europa.eu/internal_market/financial-markets/clearing/index_en.htm).
Being responsible for a safe a stable payment system (for details see http://www.ecb.int/paym/t2s/html/index.en.html).
The exchanges were selected based on the statistics of the World Federation of Exchanges (2007). A horizontal business strategy is assumed if equities trading for more than one country is provided. Vertical integration is assumed if a share of at least 50% of a clearing and/or a settlement provider is held. Diversification is assumed if at least 10% of the revenues originate from non-equity trading or post-trading activities.
NYSE Euronext owns a stake of Euroclear, NASDAQ OMX operates CSDs in the eastern markets, and the London Stock Exchange owns the Italian CCP and CSD.
The markets where selected according to the Dow Jones Global Exchanges Index (Dow Jones Indexes 2007). Only exchanges primary focussing on equities where selected. The market value is calculated on the basis of the equity prices from Reuters from 2008-08-11.
For the following analysis the net profit ration was chosen instead of the ROI due to the availability of the data in the annual reports.
The data derives from the annual reports of the exchanges. In the table listed exchanges as well as not listed but for profit exchanges are included. The exchanges Euronext and OMX are listed separately as recent mergers are not reflected in all analysed annual reports.
Not included in Table 3 are Dubai Financial Market, Singapore Exchange, Osaka Securities Exchange and Tokyo Stock Exchange Group due to missing data.
The largest equity exchanges were selected according to the World Federation of Exchanges (2007) report. Only exchanges which published these information are listed. The costs and number of trades are from the annual reports of the exchanges or from the World Federation of Exchanges report 2007.
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Schaper, T. Organising equity exchanges. Inf Syst E-Bus Manage 10, 43–60 (2012). https://doi.org/10.1007/s10257-010-0155-z
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DOI: https://doi.org/10.1007/s10257-010-0155-z