This paper investigates the market consequences of alliance formation among stock exchanges. These alliances enable brokers to match investors internationally at their local market, thereby eliminating the need for brokers to maintain memberships in foreign stock exchanges. We sort out the conditions under which alliance formation increases profits for stock exchanges and brokers, and how changes in fee structures affect investors’ participation rates and welfare. Finally, we examine several methods for implementing access fees and their welfare implications.
Introduction: Stock exchanges in Europe and in the United States are in a transition period. Two major changes are taking place at the same time. First, manybecome public (for example, London Stock Exchange, and Deutsche B¨ orse). Second, theyseek to form alliances with other stock exchanges, therebyenhancing liquidity(for example, Euronext: the alliance among the Paris, Amsterdam, and Brussels bourses; Newex: Deutsche B¨ orse with Vienna; and Norex: consisting of Copenhagen, Stockholm, Oslo, and Iceland).The present paper deals with the second aspect characterising this transi-tion period. It provides a comprehensive microeconomic analysis of alliances among stock exchanges. We attempt to answer the following questions: (1) How alliances aﬀect the fees stock exchanges levyon securityhouses, and the fees securityhouses levyon investors, as well as their proﬁts? (2) What would be the effect on investors’ participation rate, investors’ welfare, and social wel-fare? (3) What are the eﬃcient and inefficient access fee mechanisms that would characterize the formation of alliances?
Author: Oz Shy,Juha Tarkka
Source: Research Discussion Papers, Bank of Finland
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