Heiko Schmiedel

Technology, Automation, and Productivity of Stock Exchanges: International Evidence

The paper stresses on the importance of understanding the operational choices, strategies, and performances of stock exchanges as regular operating firms (Arnold et al (1999), and Pirrong (1999)) Using unbalanced panel data on 49 stock exchanges over the period 1989-1998, the paper traces the productivity of stock exchanges over time and across different types and groups of exchanges. We find significant variability in respect of the productivity - revenue and cost efficiency - across these exchanges. On average, North American exchanges are found to be most cost and revenue efficient. However, our findings also indicate that European exchanges have improved the most, in respect of cost efficiency, while exchanges in South America and Asia-Pacific regions are found to be lagging as regards both cost and revenue estimations. The evidence also indicates that investment in technology-related developments effectively influenced cost and revenue efficiency. Moreover, organisational structure and market competition are found to be significantly associated with both cost and revenue efficiency for the exchanges studied, whereas market size and quality are related only to revenue efficiency.

Return to Retail Banking and Payments

The European banking industry joined forces to achieve a fully integrated market for retail payment services in the euro area: the Single Euro Payments Area (SEPA). Against this background, the present paper examines the fundamental relationship between retail payment business and overall bank performance. Using data from across 27 European markets over the period 2000–2007, we analyse whether the provisions of retail payment services are reflected in improved bank performance, using accounting ratios and efficiency measures. The results confirm that banks perform better in countries where the retail payment service markets are more highly developed, and the relationship is stronger in countries with a relatively high adoption of retail payment transaction technologies. Retail payment transaction technology can itself also improve bank performance, and statistical evidence shows that heterogeneity in retail payment instruments is associated with enhanced bank performance. Similarly, a higher usage of electronic retail payment instruments seems to stimulate banking business. We also show that retail payment services have a more significant impact on savings and cooperative bank performance, although they do also have a positive influence on the performance of commercial banks. Additionally, our findings reveal that the impact of retail services on bank performance is dominated by fee income. Finally, an effective payment service market is found to be associated with higher bank stability. Our findings are robust to different regression specifications. The results may also be informative for the industry when reconsidering its business models in the light of current financial market developments.

Retail Payments and Economic Growth

This paper examines the fundamental relationship between retail payments and overall economic growth. Using data from across 27 European markets over the period 1995–2009, the results confirm that migration to efficient electronic retail payments stimulates overall economic growth, consumption and trade. Among different payment instruments, this relationship is strongest for card payments, followed by credit transfers and direct debits. Cheque payments are found to have a relatively low macroeconomic impact. Retail payment transaction technology itself is also associated positively to real economic aggregates. We also show that initiatives to integrate and harmonise retail payment markets foster trade and consumption and thereby have a beneficial effect for whole economy. Additionally, the findings reveal that the impact of retail payments on economic growth is more pronounced in euro area countries. Our findings are robust to different regression specifications. The study supports the adoption of policies promoting a swift migration to efficient and harmonised electronic payment instruments.

Total Factor Productivity Growth in European Stock Exchanges: A Non-Parametric Frontier Approach

This paper examines progressive changes in productivity of the European stock exchange industry using non-parametric frontier techniques.Within the framework of Malmquist indices, total factor productivity growth is decomposed into technological progress and technical efficiency change for a balanced panel of all major European stock exchanges over the period 1993-1999.The principal findings indicate an overall rise in productivity over the sample period, which is driven more by technological innovation than by efficiency improvements.According to organisational setup, technological innovation is more pronounced for exchanges with the following characteristics: automation, equity and derivatives trading, for-profit governance structure, large or medium-size capitalised markets.Technological progress can be interpreted as a sign of the dynamic nature of the whole exchange industry, in which stock exchanges take advantage of intense diffusion of new cost-effective technologies and information systems to leverage themselves onto a higher production frontier.Key words: stock exchanges, productivity, technological progress, Europe JEL classification numbers: D24, G29, C23, O52

Growth Strategies and Value Creation: What Works Best for Stock Exchanges?

In recent years, demutualized stock exchanges have been increasingly engaging in M&A and alliance activities. To examine the effect of these growth strategies on exchange shareholders’ value creation, we focus on 14 public stock exchanges and investigate their short-run share price responses to the formation of 110 M&As and alliances all over the world spanning the period 2000-2008. Our findings show that the average stock price responses for M&As and alliances are positive. M&As create more value than alliances. For alliances, joint ventures generate more value than non-equity alliances. More value accrues when the integration is horizontal (cross-border) than when it is vertical (domestic). Additionally, there is evidence of learning-by-doing effects in stock exchange integration activities. Finally, we find that the better the shareholder protection, accounting standards and capital market development in the partner exchange’s country, the higher the merger and alliance premium for our sample exchange. These patterns are consistent when we examine the exchanges’ long-run performance. JEL Classification: L22, G32, D23

SEPA, Efficiency, and Payment Card Competition

This paper analyzes the welfare implications of creating a Single Euro Payments Area. We study the effects of increased network compatibility and payment scale economies on consumer and merchant card fees and its impact on card usage. In particular, we model competition among debit cards and between debit and credit cards. We show that competitive pressures dampen merchant fees and increase total card acceptance. The paper argues that there is room for multilateral interchange fee arrangements to achieve optimal consumer and merchant fees, taking safety, income uncertainty, default risk, merchants pricing power, and the avoided cost of cash at the retailers side into account. Consumers and merchants are likely to benefit the most from the creation of SEPA when sufficient payment card competition alleviates potential monopolistic tendencies. Key Words: SEPA, card network competition, optimal pricing, economic welfare

The future of financial markets

List of Tables List of Figures Preface Acknowledgements Introduction The Payment System: Structure, Efficiency, Innovation and Regulation Technical Efficiency in Stock Markets Securities Settlement Systems E-Money: An Addendum References Index

Integration, regulation, and policy of securities market infrastructures in the euro area

Purpose – The purpose of this paper is to investigate the state of integration of securities market infrastructure in Europe. Design/methodology/approach – Given the lack of quantitative and price-based measures, this paper adopts a rather qualitative approach to evaluating the degree and evolution of integration in the securities market infrastructure within Europe. Future challenges, policy options for regulation and market design are discussed. Findings – Despite its single currency, the euro area securities infrastructure remains highly fragmented due to cross-border differences in tax regimes, procedures, laws, and vested interests. Cost savings and increased efficiency can be expected from further integration. Originality/value – This is the only paper which provides a comprehensive and comparative analysis of the current level of integration of the securities infrastructure in the euro area and its implications for regulation and market policy.

How Stock Exchange Mergers and Acquisitions Affect Competitors’ Shareholder Value: Global Evidence

The stock market globalization process has produced historic changes in the structure of stock markets, the effects of which are evident throughout the world. Despite these transformations, there are relatively few sources examining the connections between the globalization process currently under way and previous periods of stock market globalization. This seminal volume fills that gap.

Technical Efficiency in Stock Markets

Much of our understanding of the way stock exchanges may develop will depend on empirical evidence on their structures and how they have been evolving over recent years. If we can see that there are strong economies of scale, for example, then we can expect that the larger stock exchanges will either drive the smaller out of business as barriers between them fall or that the smaller exchanges will merge so that they can compete successfully with their larger counterparts. Similarly we might expect that if there is a wide range of efficiency among exchanges that persists over time despite the reduction in barriers then it will be possible for a variety of exchanges to remain in business as other sources of competitive advantage clearly exist. In this and the subsequent chapter we explore the efficiency of stock exchanges, considering both their cost and revenue structures. We employ two main approaches: stochastic frontier analysis, which assumes that it is possible to parameterise the productive behaviour in the industry and data envelopment which is nonparametric. They each have their disadvantages.