Markku Malkamäki

Economies of scale and technological development in securities depository and settlement systems

Abstract This paper investigates the existence and extent of economies of scale in depository and settlement systems. Evidence from 16 settlement institutions across different regions for the years 1993–2000 indicates the existence of significant economies of scale. The degree of such economies, however, differs by size of settlement institution and region. While smaller settlement service providers reveal a high potential of economies for scale, larger institutions show an increasing trend toward cost effectiveness. Clearing and settlement systems in countries in Europe and Asia report substantially larger economies of scale than those of the US system. European cross-border settlement seems to be more cost intensive than that on a domestic level, reflecting chiefly complexities of EU international securities settlement systems and differences in the scope of international settlement service providers. The evidence also reveals that investments in implementing new systems and upgrades of settlement technology continuously improved cost effectiveness over the sample period.

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.

Are Expansions Cost Effective for Stock Exchanges? A Global Perspective

This paper investigates the existence and extent of economies of scale and scope among stock exchanges. Evidence from 38 exchanges in 32 countries and 4 continents around the world for the years 1989-1998 indicates the existence of significant economies of scale and scope. The degree of such economies however differs by size of exchange and region. The largest stock exchanges show an increasing trend of cost effectiveness. Exchanges in North America and Europe report substantially larger economies of scale than those in the Asia-Pacific regions.

On the causality and co-movements of scandinavian stock market returns

This paper reports some tests of Scandinavian stock market indices. Firstly, Granger causality tests of daily Swedish, Norwegian, Danish and Finnish stock returns are performed. Secondly, the effects of world-wide returns on these four Scandinavian markets are analysed. Some causality between Scandinavian markets is observed. The Swedish market is found to be the leading one of the four, while the other three appear to have no significant influence on other markets. Thus, the results do not indicate full integration of information between Scandinavian stock markets. The world-wide returns seem to have significant leading effects on Scandinavian market returns. This may be due to the growing international capital movements across countries and stock exchanges. The ongoing internationalization may well have significant effects on the returns behaviour of Scandinavian stock markets, in particular in Norway, Denmark and Finland.

On the riskiness of the world's stock markets

Abstract The main aim of this paper is to study the riskiness of the worlds stock markets. This is carried out by applying the concepts of the two main asset pricing models: the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Model (APM). Certain obvious risk categories among world stock markets exist. Three major potential reasons for the existence of these different risk categories are reported. Firstly, economic trade and currency areas seem to affect the riskiness of different stock markets, with North American, European and Oceanic stock exchanges quite clearly creating their own separate factors. Secondly, the level of institutional development of a given market also appears to be a factor determining its riskiness. Thin stock markets, such as those of Finland and Mexico seem to exhibit a different price behaviour of their own. Thirdly, the combined effect of different time zones and efficiency is discussed, especially in the case of the UK stock markets vs. other European stock markets.

Strategic Challenges for Exchanges and Securities Settlement

A common feature of major trends in securities and derivative markets is that they facilitate cross-border competition between financial institutions and markets. These trends include financial deregulation, technological developments that increase network externalities and the introduction of the single currency in Europe. This paper discusses future prospects for stock and derivative exchanges and securities settlement systems globally in the light of this analytical framework. The increased contestability of the financial markets opens the way for a completely new situation where economies of scale and network effects enable new systems to challenge existing exchanges and settlement systems. This has already led towards more integrated trading and settlement infrastructure via mergers, alliances, links, agreements and other forms of cooperation between existing infrastructure companies. At the same time new electronic communication networks and electronic exchanges operated by members of exchanges or off-exchange companies and Internet brokers have emerged. We expect that economies of scale and scope and network effects will foster global competition. The business conducted by brokers and exchanges will tend to converge, thus posing a major challenge for the management of these businesses. Trading and settlement services for the most liquid global trading products will, we believe, be provided by limited liability companies that employ efficient governance practices. We anticipate that US stock and derivative exchanges will have to adopt fully electronic trading systems. This might lead to intense competition between exchanges in the US and globally. We also anticipate that European alliances will be based on a more efficient operational model than the models proposed so far. An increase in Internet-routed equity and derivative trades will lead to partial fragmentation of liquidity. As technology advances, we expect pooling of liquidity in one of the networks.

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

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.

The Payment System: Structure, Efficiency, Innovation and Regulation

It is easy to under-estimate the importance of the payment system and its contribution to the economy because it is largely out of sight. In some countries the costs of the payment system can amount to 3 per cent of GDP (Humphrey et al., 1997, p. 33). The costs of making payments can differ across countries by an order of ten, which could have a major impact on the development of the financial system and the ability to respond rapidly to new challenges and opportunities. This is particularly true for the exploitation of cross-border transactions in the EU. These issues could readily merit a book on their own. However, these aspects of financial ‘plumbing’ tend to be regarded as dull compared with banking and monetary policy. In this chapter, after a short introduction summarising the nature of the payment system and its structure, we consider just three main issues that affect the likely future development of the system: its efficiency in various countries round the world and the scope for improvement by moving to best practice; the nature of innovation in the industry and the potential for new more efficient systems both within and between countries; the role of regulators in shaping the future.

Securities Settlement Systems

In the chapter on payment systems, the issue of settlement – the final completion of the transaction to the satisfaction of the parties concerned – was largely deferred, because it is a much more substantive issue in the context of securities transactions. In the case of unidirectional payments, only one transaction has to be completed. However, in the case of securities, the security has to be ‘delivered’ to the purchaser in return for the payment.1 This creates two complications, first the matching of the two legs of the transaction and second that an additional system is required that holds and allocates titles to the securities. The first complication also exists where one payment is made in return for another as for example in currency transactions. The key issue here, however, is that several further layers are required in the transaction process.