The stock-exchange industry: Network effects, implicit mergers, and corporate governance

The evolution and integration of financial markets in recent decades have created increasing competition among stock exchanges, which are behaving more and more like standard firms. Stock exchanges are peculiar firms that produce listing, trading, and clearing services and sell price information. They have different types of customers: firms that want to be listed, financial intermediaries who want to trade securities, and institutional and private investors. Some of them, in particular financial intermediaries, are often the owners of the stock exchanges, which traditionally have been organized as cooperatives or public entities. This dissertation focuses on the stock-exchange industry, analyzing the competition among exchanges and, more theoretically, the corporate-governance problem of customer-controlled firms, of which stock exchanges are a clear example. Policy implications are provided in both cases. After the introductory chapter, the second chapter, Competition and Integration among Stock Exchanges in Europe: Network Effects, Implicit Mergers, and Remote Access, analyzes the role of network externalities in the stock-exchange industry through a model in which two exchanges compete. It is shown, using the European regulatory background, that competition may end up in inefficient equilibria while an implicit merger may be Pareto optimal and give greater profits to both exchanges. In the end, exchanges may specialize in listing and trading services, or unilaterally start to trade stocks listed on other markets (as did Seaq-International some years ago or many automated trading systems in recent years). The third chapter, Customer-Controlled Firms: the Case of Stock Exchanges, shows that monopolist customer-controlled firms, like cooperative banks, or life insurance companies, and stock exchanges, never price their goods at the monopoly price, so that minority shareholders always receive less profits. When the firm is completely customer owned, the monopolist achieves the first best, and pricing policies are irrelevant if they face a unit demand, while price equals marginal cost if the firm faces a downward demand