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COMPETITION AMONG SECURITIES MARKETS:
A Path Dependent Perspective (By John C. Coffee, Jr.)
I. THE MECHANISMS OF COMPETITION: Exchanges and other market centers have natural incentives to compete and attract order flow from rivals, but they cannot determine by themselves the trading venue. Rather, trading location is the product of decisions made by at least three different actors:
1.- issuers, who determine where to list;
2.- liquidity traders, who determine where to trade; and
3.- financial intermediaries, including brokers and dealers, who determine where to route trades and where to trade, themselves, as market makers (or their equivalents).
Competition among market centers thus hinges on a variety of different decisions by each of the foregoing actors:
1.- issuers can cross-list on multiple exchanges;
2.- financial intermediaries can move between markets, opting for whichever offers them the best trading environment;
3.- liquidity traders can opt for one market over another; and
4.- exchanges can form networks and/or merge in order to foreclose rivals. Potentially, nothing is stable.
II. WHY DO FIRMS CROSS-LIST?: The Competing Explanations. To this point, it has been argued that cross-listing is the dynamic and de-stabilizing force that will move liquidity from local exchanges to international "super-markets," thereby impelling a consolidation among market centers. But this explanation leads to an obvious further question: what motivates firms to cross-list? The answer may seem obvious: firms can increase their value through cross-listing. The evidence here is relatively clear. But there answer only leads to a further ...