Is there something special, with respect to risk and capital, about a financial conglomerate that combines banking, insurance and potentially other financial and non-financial activities? To what degree is the risk of the whole less than the sum of its parts? This paper seeks to address these questions by evaluating the risk profile of a typical banking-insurance conglomerate, highlighting the key analytical issues relating to risk aggregation, and raising policy considerations. Risk aggregation is the main analytical hurdle to arriving at a composite risk picture. We propose a "building block" approach that aggregates risk at three successive levels in an organization, (corresponding to the levels at which risk is typically managed). Empirically, diversification effects are greatest within a single risk factor (Level I), decrease at the business line level (Level II), and are smallest across business lines (Level III). Our estimates suggest that the incremental diversification benefits achievable at Level III are modest, around 5-10% reduction in capital requirements, depending on business mix.
{"title":"Risk Measurement, Risk Management, and Capital Adequacy in Financial Conglomerates","authors":"Andrew Kuritzkes, Til Schuermann, Scott M. Weiner","doi":"10.1353/PFS.2003.0005","DOIUrl":"https://doi.org/10.1353/PFS.2003.0005","url":null,"abstract":"Is there something special, with respect to risk and capital, about a financial conglomerate that combines banking, insurance and potentially other financial and non-financial activities? To what degree is the risk of the whole less than the sum of its parts? This paper seeks to address these questions by evaluating the risk profile of a typical banking-insurance conglomerate, highlighting the key analytical issues relating to risk aggregation, and raising policy considerations. Risk aggregation is the main analytical hurdle to arriving at a composite risk picture. We propose a \"building block\" approach that aggregates risk at three successive levels in an organization, (corresponding to the levels at which risk is typically managed). Empirically, diversification effects are greatest within a single risk factor (Level I), decrease at the business line level (Level II), and are smallest across business lines (Level III). Our estimates suggest that the incremental diversification benefits achievable at Level III are modest, around 5-10% reduction in capital requirements, depending on business mix.","PeriodicalId":124672,"journal":{"name":"Brookings-Wharton Papers on Financial Services","volume":"54 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2003-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133407760","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
occurring around the globe are probably best characterized as a financial services sector in flux. Transactions are particularly numerous and breathtaking in the United States and Western Europe, but restructuring is also occurring in Asia. Most striking is the escalating scale of mergers in banking. In just the last few years, in the United States mergers have led to a consolidation of money center banks (for example, the Chase Manhattan and Chemical Bank merger, prior to their subsequent merger with J. P. Morgan) and the emergence of regional powerhouses (for example, the expansion strategies of BankOne and Nationsbank and their mergers with, respectively, First Chicago/NBD and BankAmerica). In Europe mergers have also been prominent. Although cross-border mergers are relatively infrequent—with exceptions in Scandinavia and the acquisitions across the Dutch-Belgian border, such as the acquisition of the Belgian Bank BBL by the Dutch financial conglomerate ING— domestic mergers typically involve large universal banks and are often spectacular. Noteworthy examples include the marriage of the Union
{"title":"Consolidation and Strategic Positioning in Banking with Implications for Europe","authors":"Arnoud Boot","doi":"10.1353/PFS.2003.0001","DOIUrl":"https://doi.org/10.1353/PFS.2003.0001","url":null,"abstract":"occurring around the globe are probably best characterized as a financial services sector in flux. Transactions are particularly numerous and breathtaking in the United States and Western Europe, but restructuring is also occurring in Asia. Most striking is the escalating scale of mergers in banking. In just the last few years, in the United States mergers have led to a consolidation of money center banks (for example, the Chase Manhattan and Chemical Bank merger, prior to their subsequent merger with J. P. Morgan) and the emergence of regional powerhouses (for example, the expansion strategies of BankOne and Nationsbank and their mergers with, respectively, First Chicago/NBD and BankAmerica). In Europe mergers have also been prominent. Although cross-border mergers are relatively infrequent—with exceptions in Scandinavia and the acquisitions across the Dutch-Belgian border, such as the acquisition of the Belgian Bank BBL by the Dutch financial conglomerate ING— domestic mergers typically involve large universal banks and are often spectacular. Noteworthy examples include the marriage of the Union","PeriodicalId":124672,"journal":{"name":"Brookings-Wharton Papers on Financial Services","volume":"40 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2003-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117096851","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This Article addresses my observation, based on my experience in government service, that those trained in economics are much less likely to consider privacy protection important than those trained in other disciplines. The core economist intuition comes from the basic model of a competitive market, where a market is considered more efficient the closer it comes to perfect information. Full information allows the efficient matching of buyers and sellers. Limits on information, such as privacy rules, raise the costs of exchange and may even promote fraud by concealing negative information. This Article addresses that economists' intuition in a number of ways. As the Article was prepared for a symposium on the future of financial services, Part I highlights the substantial history of confidentiality in banking. Many economists believe that persistent features of markets are likely adaptive and efficient. The history of confidentiality thus raises a rebuttable presumption that confidentiality has important efficiency characteristics. Part II places the privacy debate into settings where economists are likely to have positive intuitions that confidentiality is efficient. First, consider in the security context whether it is efficient to disclose the combination to a bank safe or other security information. Second, consider whether it is efficient for a bank to disclose confidential business information about a corporate borrower to that company's competitors. Third, consider, given the risk of identity theft, whether it is efficient for a bank to reveal a customer's online password or other information that acts as a key to the customer's account. The likely efficiency of keeping this key security information confidential thus can strengthen the intuition that confidentiality may also be efficient when it comes to sensitive personal information, or the "keys to the heart." The Article next suggests reasons why economists have tended to undervalue the harms from unwanted disclosures of information. Economists, who themselves may on average care little about privacy, may have mis-gauged the tastes of other people. The Article explains significant externalities that may lead to inefficiently high use of telemarketing and other business activities that rely on information sharing. The technique of cost/benefit analysis likely tends to emphasize the costs of privacy protections, which are more easily monetizable, instead of the benefits. Certain sorts of harms, including long-run societal harms from lack of privacy, have also likely not received full weight. Fourth, a Ponemon Institute study provides new evidence about revealed behavior, and not simply about poll responses, when it comes to financial services and privacy. The most significant finding is that customers that trusted their financial institution on privacy were substantially more likely to engage in online banking. Additional research would be helpful, but this data supports the possibility t
{"title":"Efficient Confidentiality for Privacy, Security, and Confidential Business Information","authors":"Peter P. Swire","doi":"10.2139/ssrn.383180","DOIUrl":"https://doi.org/10.2139/ssrn.383180","url":null,"abstract":"This Article addresses my observation, based on my experience in government service, that those trained in economics are much less likely to consider privacy protection important than those trained in other disciplines. The core economist intuition comes from the basic model of a competitive market, where a market is considered more efficient the closer it comes to perfect information. Full information allows the efficient matching of buyers and sellers. Limits on information, such as privacy rules, raise the costs of exchange and may even promote fraud by concealing negative information. This Article addresses that economists' intuition in a number of ways. As the Article was prepared for a symposium on the future of financial services, Part I highlights the substantial history of confidentiality in banking. Many economists believe that persistent features of markets are likely adaptive and efficient. The history of confidentiality thus raises a rebuttable presumption that confidentiality has important efficiency characteristics. Part II places the privacy debate into settings where economists are likely to have positive intuitions that confidentiality is efficient. First, consider in the security context whether it is efficient to disclose the combination to a bank safe or other security information. Second, consider whether it is efficient for a bank to disclose confidential business information about a corporate borrower to that company's competitors. Third, consider, given the risk of identity theft, whether it is efficient for a bank to reveal a customer's online password or other information that acts as a key to the customer's account. The likely efficiency of keeping this key security information confidential thus can strengthen the intuition that confidentiality may also be efficient when it comes to sensitive personal information, or the \"keys to the heart.\" The Article next suggests reasons why economists have tended to undervalue the harms from unwanted disclosures of information. Economists, who themselves may on average care little about privacy, may have mis-gauged the tastes of other people. The Article explains significant externalities that may lead to inefficiently high use of telemarketing and other business activities that rely on information sharing. The technique of cost/benefit analysis likely tends to emphasize the costs of privacy protections, which are more easily monetizable, instead of the benefits. Certain sorts of harms, including long-run societal harms from lack of privacy, have also likely not received full weight. Fourth, a Ponemon Institute study provides new evidence about revealed behavior, and not simply about poll responses, when it comes to financial services and privacy. The most significant finding is that customers that trusted their financial institution on privacy were substantially more likely to engage in online banking. Additional research would be helpful, but this data supports the possibility t","PeriodicalId":124672,"journal":{"name":"Brookings-Wharton Papers on Financial Services","volume":"68 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2003-05-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123545528","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper addresses the disclosure issues for financial conglomerates principally from the same perspective as that of the Basel Committee on Banking Supervision: that disclosure is important for the safety and soundness of banks. However, we reach substantially different conclusions with respect to three important disclosure issues: the role of market value accounting; the frequency of disclosures; and the role of subordinated debt.We start by asking why any special disclosure might be required for financial conglomerates. This question immediately leads to a discussion of what is special about financial conglomerates. We also address the question of, "Disclosure to whom?" There are at least two potential audiences for information disclosures: financial regulators; and the publicinvestors/creditors/customers of a financial conglomerate. Issues of the appropriate structure for a financial conglomerate, and the information revelation that should accompany that structure, are also raised. Finally, we return to the title topic: What constitutes appropriate disclosure for afinancial conglomerate. Unfortunately, by turning its back on the three most important steps that could be taken to improve information disclosure -- mandating market value accounting (MVA) for banks' reports to regulators, aiming toward daily submission of these reports, and requiring the issuance of subordinated debt -- the Basel Committee has fundamentally undermined its efforts to enhancebanks' safety and soundness.
{"title":"What Constitutes Appropriate Disclosure for a Financial Conglomerate?","authors":"L. White","doi":"10.1353/PFS.2003.0009","DOIUrl":"https://doi.org/10.1353/PFS.2003.0009","url":null,"abstract":"This paper addresses the disclosure issues for financial conglomerates principally from the same perspective as that of the Basel Committee on Banking Supervision: that disclosure is important for the safety and soundness of banks. However, we reach substantially different conclusions with respect to three important disclosure issues: the role of market value accounting; the frequency of disclosures; and the role of subordinated debt.We start by asking why any special disclosure might be required for financial conglomerates. This question immediately leads to a discussion of what is special about financial conglomerates. We also address the question of, \"Disclosure to whom?\" There are at least two potential audiences for information disclosures: financial regulators; and the publicinvestors/creditors/customers of a financial conglomerate. Issues of the appropriate structure for a financial conglomerate, and the information revelation that should accompany that structure, are also raised. Finally, we return to the title topic: What constitutes appropriate disclosure for afinancial conglomerate. Unfortunately, by turning its back on the three most important steps that could be taken to improve information disclosure -- mandating market value accounting (MVA) for banks' reports to regulators, aiming toward daily submission of these reports, and requiring the issuance of subordinated debt -- the Basel Committee has fundamentally undermined its efforts to enhancebanks' safety and soundness.","PeriodicalId":124672,"journal":{"name":"Brookings-Wharton Papers on Financial Services","volume":"36 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2002-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133959772","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The financial services industry is ?special? in a variety of ways, including the fiduciary nature of the business, its role at the center of the payments and capital allocation process with all its static and dynamic implications for economic performance, and the systemic nature of problems that can arise in the industry. So the structure, conduct and performance of the industry has unusually important public interest dimensions. One facet of the discussion has focused on size of financial firms, however measured, and the range of activities conducted by them Is size positively related to total returns to shareholders? If so, does this involve gains in efficiency or transfers of wealth to shareholders from other constituencies, or maybe both? Does greater breadth generate sufficient information-cost and transaction-cost economies to be beneficial to shareholders and customers, or can it work against their interests in ways that may ultimately impede shareholder value as well? And is bigger and broader also safer? This paper starts with a simple strategic framework for thinking about these issues from the perspective of the management of financial firms. What should they be trying to do, and how does this relate to the issues of size and breadth? It then reviews the available evidence and reaches a set of tentative conclusions from what we know so far, both from a shareholder perspective and that of the financial system as a whole.
{"title":"Strategies in Financial Services, the Shareholders, and the System: Is Bigger and Broader Better?","authors":"I. Walter","doi":"10.2139/ssrn.333800","DOIUrl":"https://doi.org/10.2139/ssrn.333800","url":null,"abstract":"The financial services industry is ?special? in a variety of ways, including the fiduciary nature of the business, its role at the center of the payments and capital allocation process with all its static and dynamic implications for economic performance, and the systemic nature of problems that can arise in the industry. So the structure, conduct and performance of the industry has unusually important public interest dimensions. One facet of the discussion has focused on size of financial firms, however measured, and the range of activities conducted by them Is size positively related to total returns to shareholders? If so, does this involve gains in efficiency or transfers of wealth to shareholders from other constituencies, or maybe both? Does greater breadth generate sufficient information-cost and transaction-cost economies to be beneficial to shareholders and customers, or can it work against their interests in ways that may ultimately impede shareholder value as well? And is bigger and broader also safer? This paper starts with a simple strategic framework for thinking about these issues from the perspective of the management of financial firms. What should they be trying to do, and how does this relate to the issues of size and breadth? It then reviews the available evidence and reaches a set of tentative conclusions from what we know so far, both from a shareholder perspective and that of the financial system as a whole.","PeriodicalId":124672,"journal":{"name":"Brookings-Wharton Papers on Financial Services","volume":"117 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2002-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121125021","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Every MBA program that I have taught in has some Asian students, and in some Asian societies, such as Korea, it is common for a student to give a gift to a teacher at the end of the year. Some Korean students continue this practice when they are students in the U.S., and over the years I have received a number of gifts from students. Most of these gifts fall into the category of trinkets and knick-knacks, and I would guess that the average value of these gifts has been about twenty dollars. I typically accept these gifts when offered, and sometimes I even remember the student’s name. I don’t think that many people would consider my acceptance of these gifts after the end of a semester as unethical behavior. I haven’t been faced with the decision, but what would I do if I was offered a gift of a work of art, a gift worth $200? And what if I could sell this gift (I would wait until after the student graduated and left town, of course), and pocket the $200? Would accepting this gift be unethical? Would it change my behavior? What if the work of art was worth $10,000, but the Korean student let me know in advance of the final exam that he or she only gave gifts to professors in classes where an ‘A’ was received? Would this affect my decisions on what grade to give this student, especially if it turned out the student was right on the borderline between an A and a B when I was making up the grade distribution? What if the student didn’t tell me this in advance, but I had learned from experience that I would receive much more valuable gifts from Korean students if they received high grades? Would it be OK for me to accept significant gifts from students who received high grades if other professors were doing so? In other words, if it was “standard industry practice?” Because this article is about the new issues market, I will not discuss further the ethical problems associated with professors who give high grades to students and receive gifts in return. This article will focus mainly on the initial public offerings (IPOs) of equity securities. I will focus on equity IPOs mainly because this is where almost all of the controversy lies. In particular, there are controversies associated with underwriters who allocate hot IPOs to hedge funds and receive commission business in return. After presenting some statistics concerning IPOs and discussing controversies, the article ends with some policy recommendations.
{"title":"The Future of the New Issues Market","authors":"J. Ritter","doi":"10.1353/PFS.2002.0019","DOIUrl":"https://doi.org/10.1353/PFS.2002.0019","url":null,"abstract":"Every MBA program that I have taught in has some Asian students, and in some Asian societies, such as Korea, it is common for a student to give a gift to a teacher at the end of the year. Some Korean students continue this practice when they are students in the U.S., and over the years I have received a number of gifts from students. Most of these gifts fall into the category of trinkets and knick-knacks, and I would guess that the average value of these gifts has been about twenty dollars. I typically accept these gifts when offered, and sometimes I even remember the student’s name. I don’t think that many people would consider my acceptance of these gifts after the end of a semester as unethical behavior. I haven’t been faced with the decision, but what would I do if I was offered a gift of a work of art, a gift worth $200? And what if I could sell this gift (I would wait until after the student graduated and left town, of course), and pocket the $200? Would accepting this gift be unethical? Would it change my behavior? What if the work of art was worth $10,000, but the Korean student let me know in advance of the final exam that he or she only gave gifts to professors in classes where an ‘A’ was received? Would this affect my decisions on what grade to give this student, especially if it turned out the student was right on the borderline between an A and a B when I was making up the grade distribution? What if the student didn’t tell me this in advance, but I had learned from experience that I would receive much more valuable gifts from Korean students if they received high grades? Would it be OK for me to accept significant gifts from students who received high grades if other professors were doing so? In other words, if it was “standard industry practice?” Because this article is about the new issues market, I will not discuss further the ethical problems associated with professors who give high grades to students and receive gifts in return. This article will focus mainly on the initial public offerings (IPOs) of equity securities. I will focus on equity IPOs mainly because this is where almost all of the controversy lies. In particular, there are controversies associated with underwriters who allocate hot IPOs to hedge funds and receive commission business in return. After presenting some statistics concerning IPOs and discussing controversies, the article ends with some policy recommendations.","PeriodicalId":124672,"journal":{"name":"Brookings-Wharton Papers on Financial Services","volume":"19 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2002-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115435184","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper addresses the future of the foreign exchange market using two organizing (and provocative) ideas. One pertains to the market’s institutional structure, the other to its information structure. The first organizing idea is that the structure of currency markets is driven primarily by the management of credit risk. This contrasts with drivers identified by micr ostructure theory (such as management of market risk, attenuation of asymmetric information, and entry barriers). The second organizing idea is that price variation in spot currency markets is driven primarily by dispersed information. This too contrasts with the orthodox view, under which exchange rates are determined from public information. Though provocative, these two ideas are vital to understanding this market’s future. Based on drivers of the market’s current structure, I propose three scenarios for future evolution. The scenario I consider most likely is one in which the current dealer structure is maintained through dealing banks’ crosssubsidizing their liquidity provision using gains from superior order flow information.
{"title":"The Future of the Foreign Exchange Market","authors":"R. Lyons","doi":"10.1353/PFS.2002.0014","DOIUrl":"https://doi.org/10.1353/PFS.2002.0014","url":null,"abstract":"This paper addresses the future of the foreign exchange market using two organizing (and provocative) ideas. One pertains to the market’s institutional structure, the other to its information structure. The first organizing idea is that the structure of currency markets is driven primarily by the management of credit risk. This contrasts with drivers identified by micr ostructure theory (such as management of market risk, attenuation of asymmetric information, and entry barriers). The second organizing idea is that price variation in spot currency markets is driven primarily by dispersed information. This too contrasts with the orthodox view, under which exchange rates are determined from public information. Though provocative, these two ideas are vital to understanding this market’s future. Based on drivers of the market’s current structure, I propose three scenarios for future evolution. The scenario I consider most likely is one in which the current dealer structure is maintained through dealing banks’ crosssubsidizing their liquidity provision using gains from superior order flow information.","PeriodicalId":124672,"journal":{"name":"Brookings-Wharton Papers on Financial Services","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2002-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127737206","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines the future of securities exchanges. It seeks both to extrapolate logical conclusions from current trends and to provide a virtual bully pulpit to ensure that all is for the best in the best of all possible futures. Four broad themes relating to securities exchanges are discussed: information, industry structure, governance, and politics. In each area, some predictions are made, and then comments are provided on why the predictions will come to pass and on some of their commercial and regulatory implications.
{"title":"The Future of Securities Exchanges","authors":"Ruben Lee","doi":"10.1353/PFS.2002.0012","DOIUrl":"https://doi.org/10.1353/PFS.2002.0012","url":null,"abstract":"This paper examines the future of securities exchanges. It seeks both to extrapolate logical conclusions from current trends and to provide a virtual bully pulpit to ensure that all is for the best in the best of all possible futures. Four broad themes relating to securities exchanges are discussed: information, industry structure, governance, and politics. In each area, some predictions are made, and then comments are provided on why the predictions will come to pass and on some of their commercial and regulatory implications.","PeriodicalId":124672,"journal":{"name":"Brookings-Wharton Papers on Financial Services","volume":"49 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2002-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122077563","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The paper introduces a connection between the needs of exchanges to respond to the immediacy needs of their clientele and the need to manage the credit risks faced by exchange members. Queueing theory is used to represent the opportunity loss suffered by brokers engaging in multiple activities: order-flow origination and its intermediation. The role of market-making locals is depicted as enabling specialization. Brokers focus on originating order flow and locals on fulfilling intermediation needs. The capacity to specialize is constrained by the availability of creditworthy members acting as locals. This results in a tension between pursuit of immediacy and managing inter-member credit exposure. Two exchange rules, tick size and price limits, are evaluated for their effects in resolving this tension.
{"title":"The Immediacy Implications of Exchange Organization","authors":"J. Moser","doi":"10.2139/ssrn.327063","DOIUrl":"https://doi.org/10.2139/ssrn.327063","url":null,"abstract":"The paper introduces a connection between the needs of exchanges to respond to the immediacy needs of their clientele and the need to manage the credit risks faced by exchange members. Queueing theory is used to represent the opportunity loss suffered by brokers engaging in multiple activities: order-flow origination and its intermediation. The role of market-making locals is depicted as enabling specialization. Brokers focus on originating order flow and locals on fulfilling intermediation needs. The capacity to specialize is constrained by the availability of creditworthy members acting as locals. This results in a tension between pursuit of immediacy and managing inter-member credit exposure. Two exchange rules, tick size and price limits, are evaluated for their effects in resolving this tension.","PeriodicalId":124672,"journal":{"name":"Brookings-Wharton Papers on Financial Services","volume":"68 5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2002-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131709857","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Comment and Discussion","authors":"F. Edwards","doi":"10.1353/PFS.2002.0010","DOIUrl":"https://doi.org/10.1353/PFS.2002.0010","url":null,"abstract":"","PeriodicalId":124672,"journal":{"name":"Brookings-Wharton Papers on Financial Services","volume":"2002 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2002-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131315749","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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