(Tuesday, 20th May 2008)
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Financial exchanges—including famous stock exchanges and futures bourses—have undergone radical change in technology, organization and ownership structure, and governance over the past 15 years. Moreover, the organizational choices of exchanges are being subjected to increasing scrutiny on both sides of the Atlantic. This lecture will examine the connection between trading technology (face-to-face auctions vs. electronic markets) and the organizational and ownership forms of exchanges. In particular, I will discuss how not-for-profit form and member ownership is well adapted to traditional open outcry auction trading, but for profit form an investment ownership is well adapted to electronic markets. I will also discuss how extensive economies of scale and scope in the execution and post-trade processing of transactions affects vertical integration decisions, and the efficiency implications of using non-profit cooperatives to supply post-trade services in an electronic environment. Finally, I will discuss how the change in organizational form and ownership affects the incentives of exchanges to prevent and deter opportunistic trading practices such as manipulation and fraud.
Bibliographical references :
Craig Pirrong, A Theory of Financial Exchange Organization, Journal of Law and Economics, Vol. 43, No. 2, (Oct., 2000), pp. 437-471.
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Craig Pirrong, Securities Market Macrostructure: Property Rights and the Efficiency of Securities Trading, Journal of Law, Economics, and Organization, Vol. 18, (2002), pp. 385-410.
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Craig Pirrong, The Industrial Organization of Execution, Clearing and Settlement in Financial Markets, (October 9, 2007), mimeo.
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Craig Pirrong, Electronic Exchanges Are Inevitable and Beneficial, Regulation, Vol. 22, No. 4, 1999.
Craig Pirrong, The Thirty Years War, Regulation, Vol. 28, No. 2, 2005.