Bank ownership of multilateral trading facilities and implications for historical exchanges: An industrial economics approach

The aim of this paper is to address bank ownership in Multilateral Trading Facilities (MTFs) and its implications for historical exchanges. We propose an oligopoly model with network effects to account for an exchange industry that consists of two MTFs and an historical exchange. Based on the observ...

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Bibliographic Details
Published in:Economic modelling 2017-09, Vol.65, p.9-17
Main Authors: Lahet, Delphine, Vaubourg, Anne-Gaël
Format: Article
Language:English
Subjects:
Economics and Finance
Humanities and Social Sciences
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Summary:The aim of this paper is to address bank ownership in Multilateral Trading Facilities (MTFs) and its implications for historical exchanges. We propose an oligopoly model with network effects to account for an exchange industry that consists of two MTFs and an historical exchange. Based on the observation that banks are both owners and clients of MTFs, we examine banks' incentive to influence the pricing policy of MTFs. We show that when brokerage and trading activities are particularly important for banks' revenue relative to their profit as MTF operators, certain market outcomes may emerge whereby both MTFs include banks' interest as clients in their objective function. We also demonstrate that accounting for banks' interest in MTFs' objective function acts as a competitive device that reduces the price and the profitability of the historical exchange.
ISSN:0264-9993
DOI:10.1016/j.econmod.2017.04.014