Working Paper: CEPR ID: DP6923
Authors: Estelle Cantillon; Pailing Yin
Abstract: In a famous episode of financial history which lasted over eight years, the market for the future on the Bund moved entirely from LIFFE, the incumbent London-based derivatives exchange, to DTB, the entering Frankfurt-based exchange. This paper studies the determinants of traders' exchange choice, using a novel panel dataset that contains individual trading firms' membership status at each exchange together with other firms characteristics and pricing, marketing and product portfolio strategies by each exchange. Our data allows us to evaluate different sources of heterogeneity among trading firms and thus distinguish between different explanations for the observed phenomenon. The story the data tells is one of horizontal differentiation and vertical differentiation through liquidity. As a result, DTB attracted a different set of traders than LIFFE, and those traders contributed to the market share reversal.
Keywords: intermediation; multihoming; network effects; platform competition; tipping
JEL Codes: D4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower transaction fees (D23) | dtb attracted liquidity-sensitive traders (G19) |
| dtb attracted liquidity-sensitive traders (G19) | increase in dtb's trading volume (F69) |
| dtb's product offerings (Y10) | attracted traders who engaged in trading the bund (G15) |
| access deregulation (K23) | facilitated membership growth (J54) |
| political pressure (D72) | trader decisions (G11) |