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Competition and Integration Strategies of Stock Exchanges Assignment Sample

1. Introduction

There are currently 250 organisations designated as exchanges worldwide, and both alone and collectively, they are essential to the functioning of most national economies as well as the global economy. They offer markets for all of the major commodities and assets traded throughout the world, as well as cash, futures, options, and other derivatives.

International and national stock exchange competition is a relatively new phenomenon. It was challenging to imagine exchanges as businesses that create, sell, and compete with one another for clients until a few decades ago. Exchanges have historically been thought of as either formally private organisations but are heavily governed by public laws or as public enterprises. Given the distinctive nature of their operation, which closely matched that of a public good, they were frequently legal monopolists in both situations.

Exchanges used to have natural monopolies in the provision of many of their services, but this is no longer the case (Steil, 1996b). A monopolistic exchange that was owned by its members lacked the motive to maximise profits since the members in charge were not allowed to receive any earnings from the exchange. Exchanges are becoming increasingly aware that they must demutualize in order to convert a member-owned corporation into a stock company if they are to compete with businesses whose objective is to maximise shareholders' wealth. Exchanges have never been thought of as enterprises, but they have changed to become corporations with a focus on business. It is vital to revaluate what an exchange is, what its products are, where its revenues come from, and who its customers and suppliers are in order to comprehend the firm's perspective on an exchange. Exchanges are unique business entities that offer services for listing, trading, and price distribution. Direct consumers include publicly traded corporations, those looking to go public, information providers, and brokers who conduct business on the exchange. Indirect customers of an exchange, intermediaries trade on behalf of both individual and institutional clients.

Network providers are vendors. Listed firms serve as both information providers and trading venues for their stock.

This finance assignment dissertation's main goal is to examine the integration and competition tactics of businesses that resemble stock exchanges.

The dissertation is concerned with:

1. Stock exchange industry dynamics
2. The evolution of mergers on stock exchanges
3. Integration tactics, as well as
4. Trends in future consolidation.

The tendency toward globalisation has been hastened by technological developments. Specifically, remote access to trading systems, which suggests that stock exchange services can now be accessed from anywhere, includes companies whose stocks are traded on global exchanges while still being readily available to local investors. With such a setup, a competitive atmosphere is likely to emerge, where the most effective exchanges will eventually gain the trust of investors, traders, and businesses (Cybo-Ottone, Di Noia and Murgia 2000). The ecosystem surrounding the European stock exchange is continuously altering in structure. New stock exchange alliances, stock exchange privatisations, Internet exchanges, electronic exchanges, online brokers, etc., appear in the media almost every day. The deregulation of stock exchanges, advancements in technology, and a growing internationalisation of the securities markets have all contributed to increased competitiveness, which is the main force behind the developments.

Existing exchanges and electronic communication networks serve as competition (ECNs).

Due primarily to the restructuring of the securities markets, there is now more competition among stock exchanges, which has resulted in mergers, technology agreements between existing exchanges, price wars, takeovers, and the opening of new exchanges, even within the same nation. Quasi-exchanges, commonly referred to as ECNs, have recently posed a threat to exchanges. They are stock exchange parasites. Since they often exclusively trade stocks listed on other exchanges, they not only profit from the listing process but also from the price discovery process that allows exchange members to direct trading to them. ECNs are destroying more and more of the current stock exchanges' revenue streams.

One of the most likely strategic contacts between stock exchanges has been mergers. The idea provided here is based on research on network externalities. Exchanges can be thought of as networks where the value of the network increases exponentially as the network's size increases (Shapiro & Varian, 1999). In other words, people are more drawn to larger networks than to smaller ones. According to Castells (2000), a network's connectivity and consistency are related. When companies choose a listing exchange, they go for the one that has the most intermediaries connected to it and regularly offers the most liquidity.

The introduction of the euro has increased demand for stock exchange consolidation throughout Europe. Further facilitating the integration of the regional financial markets is the complete implementation of the Investment Service Directive 1992 (ISD), which grants its members remote access throughout the European Union (EU). The horizontal merger paradigm is being promoted by the European Securities Forum. In this concept, the three functional levels of trading, clearing and settlement, and custody are where national exchanges integrate. Through a single point of entry, each market participant has access to a variety of pan-European services.

This concept has led to the creation of Euronext, a consolidated organisation made up of the exchanges in Paris, Amsterdam, and Brussels, as well as the proposed development of International Exchange (iX) from the London Stock Exchange (LSE) and Deutsche Börse (DB).

The analysis of industry dynamics and integration strategies will be done within an analytical framework. The models employed include Ansoff's Product-Market Matrix, Network Society, and Porter's Five Forces Model. These models are used to illustrate how exchanges came up with their integration and consolidation methods as well as their reasons for wanting to merge.

A total of 5 interviews were performed with members of the London Stock Exchange, Hong Kong Stock Exchange, investment banks, and brokerage businesses due to the industry's rapid evolution. Interviews served as the basis for the primary data sources. Academic journals, novels, periodicals, and working papers were among the secondary data sources. This paper, which contains a literature analysis, conclusions and explanations, and two case studies, is the deliverable.

The project was carried out using a conventional methodology, including project specification, literature review, fact-finding, investigation, case analysis, and assessment.

The first conclusion drawn from the interviews is that merging is an obvious tactical choice for exchanges. This approach can produce economies of scale, network externalities, increase profitability, and boost the effectiveness of the facilities used for order routing and decision-making. With the assistance of the financial markets harmonisation, a cross-border merger between two exchanges is made possible in Europe.

The second observation is that mergers result in the vertical merger and horizontal merger patterns of convergence.

The former shows how exchanges join forces to create a comprehensive financial services company that facilitates trading in a wide range of financial instruments, including stocks, options, futures, and other derivatives. The latter defines the joining of specialised exchanges, which results in compatibility, a notion in which intermediaries dealing on one exchange are provided with remote access in other member states, with reciprocity and without additional restrictions.

The third result is that future inter-exchange alliance or merger is restricted by the existence of national regulatory frameworks, which are intricately woven with their corresponding regulators. It is improbable that we will soon achieve the ultimate aim of having a supranational regulator that enforces its own rules on the entire world.

The single price and time priority are not a problem in order-driven markets like the London Stock Exchange and the Hong Kong Stock Exchange, according to the fourth study. In contrast, each market maker acts as an execution centre in a quote-driven system like Nasdaq while adhering to rules established by the National Association of Securities Dealers (USA). There is room for the development of ECNs in quote-driven or hybrid systems. Quote-driven trading systems are gradually in danger of being replaced as a result of ECN growth.

A fascinating consensus regarding the reasons why investors decide to trade on an ECN can be drawn from the sixth finding. As long as they can execute their orders at the best price, investors are unable to distinguish between the functions of a stock exchange's trading system and those of an ECN. Price competition alone is insufficient for an ECN to survive. They are incompetent in drawing capital and disseminating information.

The structure of this dissertation is as follows:

• An exchange is a firm, according to Section 1;

• Section 2 examines the competitiveness and integration that the stock exchanges in Asia and Europe currently face;

• Section 3 shapes industry dynamics using Porter's Five Forces and network externalities, and then uses Ansoff's Product-Market Matrix to choose a stock exchange strategically;

The London Stock Exchange and the Hong Kong Stock Exchange are analysed using the interview methodology in Sections 4 and 5, respectively, while Section 4 further develops the findings and connects them to the theoretical framework and literature review.

2. Review of the Literature

2.1 What is an Exchange?

A stock exchange serves two main purposes. The listing of securities comes first. The stock exchange is responsible for overseeing the issuers' statutory information responsibilities as well as approving prospectuses for qualified securities. Second, the stock exchange serves as a trading venue for its participants to transact in the listed securities. Prior to the auction, the brokers physically assembled on the floor to fix the price. Brokers are no longer required to be present in person at the stock exchange because the majority of them now use computerised trading systems of some kind.

A market similar to the one where fruits and vegetables are traded can be observed in stock exchanges. The most prosperous ones will continually be modifying and expanding their market operations while still having reasonable regulation since they operate in accordance with the rules of supply and demand. Domowitz provided a thorough definition, saying: An exchange is a trading platform that must meet the following requirements:

• Offer trade execution tools

• Consistently or continuously provide price information in the form of purchase and sell quotations.

• Use its trading methods, regulations, or mechanisms to engage in price discovery.

• Be a single price auction, a consolidated limit order book, or a formal market-maker structure.

• Centralize trading for trade execution purposes.

• Include members

• Show that the system's rules and/or design have a good chance of generating liquidity in the sense of regular entry of buy and sell quotations, so that both buyers and sellers can anticipate to regularly executing their orders at these quotes.

Regulatory authorities often define an exchange as a company, corporation, or individual that offers a market for the exchange of securities between buyers and sellers. Traditionally, members who are also mediators own an exchange. Members did not have the incentive to invest in the infrastructure of the exchange, including the technology and trading facilities, under a member ownership structure because the rewards from these investments could not be transferred to them. The profitability of an exchange and, thus, its competitiveness were hampered by a lack of drive. In addition, prices were raised for intermediates that traded on monopoly exchanges.

They charged their consumers more to cover the rising operational costs. Members were hesitant to approve a transaction levy hike because of this. According to Hansmann (1980), the non-profit producer has the ability to raise prices...without much concern for customer backlash; nevertheless, it lacks the incentive to do so because those in charge are not allowed to keep the profits.
Exchanges have had to become more competitive as time has gone on in order to draw quality companies to list and intermediaries to trade; several of them have done this by demutualizing the member ownership arrangements they previously had. Demutualization plan participants are given shares of the exchange. They become exchange shareholders and are therefore potentially eligible for profit distribution. Since that time, exchanges have changed to become businesses with a focus on business and the maximisation of shareholder wealth.

2.1.1 Products

In addition to the role they play in an economy, stock exchanges can also be seen as a company that manufactures goods. The result is the development of a market for financial instruments, which transfers ownership of the stock exchange's pricing information. A stock exchange's products more explicitly include listing, trading, price-information services, and clearing & settlement, the percentages of which are displayed in Table 1. Given that other services are not usually included in the offering, the income distribution from these multiple products demonstrates that the emphasis is mostly on listing and trading.

Table 1

Fees Europe % N. America %
Listing 19.3 32.1
Trading 45.1 39.7
Services 24.4 22.6
Other 11.2 5.7

The "firm" perspective is concerned with the exchange's output and financial success. According to Mulherin et al. (1991), a financial exchange is not a market as it is typically understood, but rather a company that establishes a market that is distinguished by the use of financial vehicles.

According to Lee (1998), a security market should be thought of as a business that produces the following goods: research, pricing information dissemination, clearing and settlement services, securities trading, and listing. The aspect of providing settlement services is not covered in this dissertation because many exchanges either ignore it or outsource it to a different organisation.

Given that the consequences of network externalities produced by listed companies and intermediaries are the main focus of the dissertation, the exchange is viewed as a producer of listing and trading services.

2.1.2 Revenues

General fees, both initial and annual, make up the profits from listing and trading. Settlement & Clearing as well as price-information services are provided. As a result, the trading services provided by a stock exchange can be divided into three categories: the traded item (issued by some businesses that often pay a fee to have it listed), the trading medium (trading facilities, computers, a computerised floor, settlement), and price dissemination.

The front end of stock exchanges can be divided into the listing, trading, and related services. The unglamorous part that follows the trading of stocks or bonds on an exchange is clearing and settlement. A securities depository settles the trade by transferring the securities from one account to another, while a clearing house verifies that the buyer and seller have the funds and securities necessary to complete the transaction.

The degree to which an exchange is successful at drawing order flow and achieving the capacity to generate revenues is determined by its profitability (Lee, 1998). Order flow denotes market liquidity and trading volume, which is made up of both the number of deals made during a given time period and the total value of the shares moved. For an exchange, it creates income both directly and indirectly. The exchange's receipts for transaction services, which depend on how many trades it executes, have a direct impact. The trade volume recorded on an exchange is frequently used as a marketing technique to draw new listings to the exchange, which causes the indirect impact.

2.1.3 Customers

Both direct and indirect customers make up an exchange.

Both listed companies and those looking to go public are direct clients who pay for the use of listing services. They also include information suppliers who pay to have access to terminals and the right to share price information, as well as intermediaries who pay to be allowed to participate in trading.
Individuals and institutions who place orders with intermediaries for execution on an exchange are considered indirect customers. Either online trading or trading through a middleman is options. They both consider the exchange's quality, pricing variables, and transaction costs. Their decisions are influenced by factors in the market microstructure such as liquidity, price discovery, or immediacy, reputation, and monetary regulation. Share registration service fee revenue from initial public offerings is included under other income.

2.1.4 Suppliers

Due to the fact that they supply the data and the shares for trading, listed firms are also suppliers. The network provider, who offers physical connectivity services on an exchange infrastructure, is another category of suppliers.

The globalisations of financial markets and exchange competitiveness have led to an exchange's transformation from a market to a firm, as described above.

2.2 Globalisation of Financial Markets

Cross-border securities trades have increased significantly since 1980. By 1988, one in four stock market transactions worldwide involved a foreign counterparty or a foreign security (Howells and Bain, 2000). The estimated global turnover of foreign exchange more than doubled between 1989 and 1995.

Cross-border business in Europe is becoming more and more common since the creation of the European Union. Investors in Europe are being encouraged to do more cross-border transactions in quest of lucrative business possibilities by the introduction of the euro and a wider use of equity as a financing mechanism. Nevertheless, despite the allure of international trading, the majority of stock exchanges in Europe are national organisations that exclusively deal in domestic, country-specific equities.

But given that more stock exchanges are striving to operate internationally, this market structure seems to be shifting. According to a Transaction Survey conducted by the Hong Kong Stock Exchange in 2000, institutional investors from abroad have greatly boosted their involvement in the Hong Kong market. The creation of pan-European exchanges that allow for the trading of equities from various European nations has been the subject of numerous ambitious projects in Europe recently. The creation of these exchanges will probably have a significant positive impact on the financial markets. Examples of possible by-products of consolidation include the standardisation of trading platforms across exchanges, an increase in market liquidity, and a decrease in market fragmentation. These developments could assist to reduce the costs and issues related to cross-border trading in Europe.

Markets for goods and services are becoming more globally interconnected despite the presence of protectionism and barriers to free trade (Castells, 1996). In response to increased competition, financial institutions are expanding their business operations by creating new products or by entering new markets. Additionally, they are expanding their customer base to take advantage of size and scope economies.

Expansion takes place both within and outside of national borders in order to create a foothold in foreign markets. By enabling more effective transmission of information, goods, and services in the late 20th century, new communication and transportation technology contributed to the globalisation of markets.

2.2.1 Europe: Vision to Become a Pan-European Financial Market Since the 1957 Treaty of Rome, which founded the European Economic Community (EC), the idea of harmonising financial laws to create a single financial market across the EU has been advanced (Howells and Bain, 2000). In the 1960s, there was a significant liberalisation of the financial markets with regard to direct investments, commercial credits, and the purchase of assets on foreign stock exchanges. Securities markets and the insurance services sector are now part of the EU's true single financial market. Companies were able to list their shares or raise capital on other EU stock exchanges thanks to the Directive Co-ordinating the Conditions for the Admission of Securities to Official Stock Exchange Listing, which was passed in 1979. Based on the principles of the Single European Act, the ISD applied the single passport principle to non-bank investment firms, removing obstacles to the construction of branches across the EU for all firms as well as the provision of cross-border securities services. Additionally, it loosened the restrictions on who can access stock exchanges, financial futures exchanges, and options exchanges. All member states shared mutual recognition and home-country control for all security companies and banks providing investment services.

Similar to other financial services, the insurance sector saw the adoption of a number of directives, all of which established a company's ability to operate in another member state.

One step toward achieving economic convergence in Europe was the introduction of the Euro as a shared currency on January 1, 1999, by 11 European countries. With the establishment of shared, centralised accounting and administrative systems, the member countries' currency exchange expenses are drastically reduced, and price transparency is increased. When dealing with one currency instead of several different ones, even non-members interacting with member countries may benefit from improved price transparency (Geradine, 2000).

As was mentioned above, globalisation has emerged as a significant force for change, as evidenced by the quick rise of cross-border portfolio investment and market collaboration.

2.2.2 Asia: Evolution of Strategic Alliances and Cooperation

The exchange alliances and cooperative agreements moved at a frenzied pace in the Asia-Pacific region.

Most Recent examples include: The NASDAQ AMEX Pilot Program for the trading of seven worldwide shares (Amgen, Applied Materials, Cisco Systems, Dell, Intel, Microsoft, and Starbucks) in Hong Kong was launched on February 1 as a result of a collaborative agreement between the HKSE and Nasdaq. Following the customary T+2 (the second trading day following the transaction) settlement period, these shares may be traded and settled in Hong Kong dollars.

For instance, the Jakarta Stock Exchange and the Amsterdam Exchange, the Singapore Exchange and the Australian Stock Exchange, the Stock Exchange of Thailand and the Tokyo Stock Exchange have all signed Memorandums of Understanding to facilitate information sharing and cooperation on regulatory matters.
The Osaka Securities Exchange and Nasdaq Japan Inc. announced a business cooperation agreement in Japan to create Nasdaq Japan, which will accept listing applications for the Nasdaq-Japan market. In order to better manage their operations and protect investors, The Tokyo Stock Exchange and the Korea Stock Exchange inked another agreement of cooperation. This enabled a valuable information exchange on the promotion of stock investment and oversight of market activities.

2.3 Nature of Competition of Stock Exchanges

The development of new financial instruments, the waning monopoly of banks as a source of direct funding to borrowers and of direct investment for investors, the phenomenal advancement of information technology, a greater emphasis on financial literacy among people, and the fluctuations in interest rates, prices, and exchange rates brought on by the oil crises have all contributed to the growing importance of securities markets in the financial system, both as regulated exchanges and over the counter markets (OECD, 1996). All financial intermediaries (banks, mutual funds, etc.) perform a risk-management activity in between borrowers and lenders on the one side and markets on the other, providing a sort of risk insurance, according to new theories of financial intermediation (Allen and Santomero, 1996; Allen and Gale, 1997). Despite this, markets and banks can coexist (Boot and Thakor, 1997).

Because it makes exchanges more comparable and integrated, the development and transformation of the securities markets and information technology is a significant concern in both Europe and the United States. Investors now face a market whose boundaries are becoming increasingly hazy. As a result, rivalry between stock exchanges as well as between exchanges and automated trading systems is growing (Pagano and Steil, 1996). (Domowitz & Lee,1996).

Exchanges compete against one another in an effort to draw order flow. The market is fragmented mostly because no single exchange dominates in the economic sphere or because each exchange is too small on its own to have an impact on prices, yet is unwilling to act jointly to consolidate its market dominance (Lee, 1998). Both make the case that differing laws and regulations may be what prevent them from engaging in the same activities. Since ECNs have been implemented, the marginal cost of new transactions is effectively zero. Its introduction, which allows investors to automatically find the lowest-cost market, increases the pressure. Each of the issues of competition from ECNs, fragmentation, and rivalry are examined in the sections that follow.

2.3.1 Rivalry among Exchanges

Rivalry is a competition between various exchanges working for the same objective. All exchanges and trading platforms aim to draw liquidity as their main objective. A marketplace for the exchange of assets at the lowest possible transaction cost is a requirement for an exchange to be competitive. Exchange charges and brokerage commissions are examples of direct costs. According to Lee (1998), one of the characteristics of indirect costs is the lack of liquidity, which prevents the simultaneous purchase and selling of an unlimited number of assets at the same price and without delay. Deregulation of brokerage commissions also suggests a threat to trading as a source of income. An exchange has to entice more businesses to list and more intermediaries to trade in order to increase profitability.

Exchange competition is nothing new, particularly in the United States. For instance, these can be discovered from the early years of the NYSE. The Consolidated Stock Exchange3 opted to trade NYSE-listed equities in 1885, choosing to do so at a reduced commission rate because it used NYSE quotes and did not have to pay for a price-discovery system to be set up (Mulherin,1991). The empirical analysis of the recent integration of the US equity markets is done by Blume and Goldstein (1997).

In more recent times, the London Stock Exchange, which underwent significant reorganisation in 1986, unilaterally decided to allow trading of the most significant European equities on its international division (SEAQ International). Other European equities traded on national exchanges had to immediately upgrade their markets because it had gained such a big market share. The LSE is currently up against Trade point on a national level. The LSE has reduced its costs by more than 60% to undercut trade point after entering the market in 1995 and receiving the trades of three out of four Inter-dealer markets. To better compete with the order-driven European exchanges, the LSE made the decision to switch from a quote-driven system to an order-driven system for the leading shares of the FT100 Index.

Since it is possible to trade securities that are typically listed on exchanges on quasi-exchanges like automated trading systems (ATS), exchanges are now up against even more competition. Even though their nature is unclear from a regulatory perspective, ATS compete with exchanges.

2.3.2 Fragmentation

No one participant controls the market, which is characterised by fragmentation. The goal of exchanges operating in the same nation is to have a single exchange that focuses all securities trading, has a single order execution system, and consolidates all news releases with a single data dissemination centre. If not, expenditures in staff and technology will duplicate resources and affect liquidity.

The proposed creation of a Small and Medium Enterprise Securities Exchange to serve the needs of small and medium-sized businesses that do not match the listing standards of the PSE main board has previously been opposed by the Philippine Stock Exchange (PSE). If this kind of plan had been implemented, the market would have been divided and liquidity would have been reduced.
As was already said, a market that has multiple trading systems and no official linkages between their market structures is said to be fragmented.

2.3.3 Competition from ECNs

An ECN can be viewed as a particular form of exchange from an economic perspective, one that focuses on providing trading services without providing listing services and typically trades securities that are already listed on regulated exchanges. ECNs are low-cost, profit-oriented distribution channels that compete primarily on price while also taking advantage of quote-driven markets like Nasdaq's alleged lack of customer service. ECNs represent more than 15% of all US orders and almost 30% of Nasdaq activity (Baker, 2000). Instinet and Island, the two biggest ECNs, control 13% and 12%, respectively, of the Nasdaq market.
Some ECNs have submitted applications to the SEC to upgrade to full stock exchange status in order to stop paying Nasdaq trade reporting and quote fees, significantly reducing their operational costs and escalating rivalry with stock exchanges.

From the standpoint of the investor, broker-dealers can trade at the best price and in the most economical trading and settlement environment thanks to connection and advanced order-routing software (Butler, 2001). The likelihood that there will be enough liquidity in the system even in the face of growing market fragmentation increases as technology improves communication between market players. Vendors of ECN software have been successful in developing a virtual market.

Users won't care where their orders are fulfilled as long as they can receive the greatest prices on the market. This is due to the fact that while investors are naturally drawn to the most liquid platform that offers price transparency, they are also increasingly motivated by the need to reduce trading expenses.
ECNs are fragmenting the market from an exchange's perspective since they are stealing liquidity from the exchanges. But because they are bringing about price transparency, which makes it simpler to recognise prices, they are also concentrating liquidity (Butler, 2001). In the US, the emergence of ECNs is seen as the market's direct reaction to unhappiness with the pricing advantages enjoyed by floor-based exchange members. Exchanges need to be able to deliver the proper goods and services to the market in the most effective manner and at the most affordable price in order to thrive and grow.

ECNs provide the same purpose economically as exchanges (Britton, 2000). With a primary focus on order matching and execution at the most aggressive price, they appear particularly strong.

2.4 The effects of the increasing competition among Stock Exchanges

In terms of future market structures in Europe, it is challenging to assess the implications of the increased competition among exchanges. On the one hand, only the most effective exchanges should endure in the long run, trading equities from all other European nations and providing the most cutting-edge and aggressive financial products (especially derivatives). The existence of thirty European stock exchanges, nearly all of which use the same fundamental trading process (the continuous electronic auction), is, at the at least, redundant and a waste of resources, as noted by Steil (1996b). After 1996, the availability of remote membership will surely be expanded, which will undoubtedly help to remove significant obstacles to the development of a shared and larger pool of equity market liquidity and facilitate cost-effective cross-border trading.

The market would become even more integrated if there was a single European currency. This argument is supported by the first model in this study; just one trade (but not necessarily the most efficient) should endure.

On the other hand, especially following the introduction of the Euro, it's probable that a separate exchange will only develop for highly standardised and/or traded products (like government bonds, derivatives, and stocks of the biggest firms). In fact, remote access renders any competition between the various exchanges pointless, at least if they are on an equal technological level. In addition, the informational advantages provided to national firms, particularly small and medium-sized ones, by their national exchanges and intermediaries, will continue to be significant. Last but not least, all previous initiatives or attempts to establish a distinctive European stock market (PIPE, Euroquote, etc.) have failed. In any case, various trading techniques might readily provide the justification for the coexistence of numerous markets in various countries dealing in the same equities (as continuous auction favours transparency and market making favours liquidity).

The stock exchange market is becoming more and more globalised. Cross-border business is now feasible and easy thanks to technology, and deregulation has made it possible to take advantage of these opportunities. Market participants now have the option to join foreign stock exchanges remotely according to the EU Investment Services Directive (ISD), and stock exchanges can now set up electronic access abroad.

The internationalisation of the stock exchange environment has also been fueled by the demand side, particularly through institutional investors' investment practises. The involvement of institutional investors is becoming increasingly important to the development in the stock-exchange region in light of the growing volume of pension savings. In order to get higher returns, investors' portfolios are susceptible to more diversification.

This tendency has been greatly accelerated by the advent of the euro, which allows investors to diversify their holdings across numerous nations without taking on any exchange-rate risk. Institutional investors, who are frequently subject to placement restrictions limiting the number of investments made in foreign currencies, have found this to be of particular importance.

2.5 Revolutionary Changes of Technology in the Securities Markets

Information technology advancements have significantly influenced changes in the securities trading industry in a number of ways. First, electronic trading platforms can now process complex orders with ease. Second, unlike traditional floor trading, where the number of participants is physically constrained, the systems can support essentially an infinite number of users. Thirdly, geographical boundaries have been blurred by IT development. In theory, installing a terminal/PC and connecting to the system is all that is needed to participate in an electronic trading system.

The world is going through a dramatic expansion in the context of economic globalisation, as explained in section 2.2. Over the past 20 years, there has been a significant increase in international trade, money flows, foreign direct investment, and migration (Holland, 1987; Dunning, 1992, 1993). According to this theory, social, cultural, and political life have also undergone a comparable globalisation that has affected local communities and weakened links to national identity, citizenship, and political sovereignty (Held, 1991; Robertson, 1992). This economic and social globalisation was made possible by the creation and dissemination of technological advancements.

2.5.1 Evolution of Online Brokerage Firms

Technology globalisation was described as global technology exploitation by Archibugi and Michie in 1997. Businesses are utilising their innovations on international markets by either exporting goods that incorporate them or by licencing the technology. This suggests that financial institutions have taken advantage of the Internet and new digital technologies to expand internationally in order to cut operating costs, eliminate the need for intermediaries, and increase awareness and choice. Growing volumes of trading are being diverted away from existing exchanges and from the traditional member firms of the exchanges through the development of online brokerage firms as new avenues to reach customers.

To compete with the established member firms of exchanges, online brokerages with innovative business models have emerged (Weber, 2000). A study by the Securities
Industry Association (SIA) predicted that by 2003, 50% of retail stock market trades would be conducted online, up from 37% in 1999. Additionally, according to the SIA, 18% of stock buyers and sellers now use the Internet, up from only 10% a year ago. Around 150 firms already offer Internet trading, according to the US Banker. Since 1997, there have been five times as many daily average online trades, which currently surpass 500,000. From 2.2 million households a year ago, there are now 3 million investing online (Haggin, 2000).

E-brokerage is a direct electronic market access that enables investors to deal with buyers and sellers directly instead of going through an intermediary (Tunick, 2001). Some exchanges serve as a trigger in certain situations, enabling investors to cut out the middleman and trade straight within the execution destination of their choosing. For instance, the New Zealand Stock Exchange intends to introduce a wireless securities trading system that will enable investors to trade stocks directly with one another rather than through a broker. Under such an arrangement, investors can use a WAP-capable phone or palm computer to connect to the exchange's WAP server via their Internet service provider.

2.5.2 Impact of ECNs

New MONSTERS (Market-Oriented New Systems for Terrifying Exchanges and Regulators) have emerged as a result of computer technology (Lee, 1998). To maintain proven trajectories of performance improvement to the current trading systems, ECNs evolved as an incremental innovation. As a result, there is regulatory competition between regulated exchanges and ECNs, such as Instinet and the New York Stock Exchange (NYSE). Section 2.3.3 has described the ECNs' problems with competition.

2.5.3 The network effect - the advantage of being first and largest

The advantage of being first or largest in the market has likely functioned as a barrier to competition, but technological advancement and growing internationalisation have heightened competitiveness in the stock exchange sector.

In general, having multiple players in a trading system is advantageous to the users. This is so because it's expected that as participants grow, so does the system's liquidity. As a result, investors are able to purchase and sell assets at reduced spreads without having their opinion of the price of the securities negatively impacted. Investors frequently choose the big, well-known marketplaces because of the beneficial effect of numerous people using the same system (network effect).

The benefit of entering the market first has been advantageous to traditional stock exchanges. Meanwhile, high establishment expenses have reduced competitiveness. Given these circumstances, traditional stock exchanges have not always had a strong incentive to adopt cutting-edge technology or to evolve in line with market demands. For instance, the introduction of automatic trading systems to replace floor trading was delayed until the biggest stock exchanges. Floor trading is still a significant component of trading on the New York Stock Market, the largest stock exchange in the US.

It is conceivable to consider a network-externalities literature application to financial transactions and intermediation. Although it is a relatively recent topic, the use of network externalities in finance has advanced significantly in recent years. When it comes to stock exchanges, they can be thought of as networks where market uncertainty, as measured by the variance of market prices, is reduced the more traders (taken from the same distribution of uncertain endowments) enter the market (Economides, 1993).

Domowitz's study is one that specifically incorporates network externalities into exchange competition (1995). He sets up a game between exchanges using network externalities, though this is not analytically explained. In this game, traders can choose between floor trading and automated trading, and network externalities are what traders refer to as the liquidity effect because the more traders there are in a market, the more liquid it is. It is believed that the higher network externalities provided by electronic exchange structures will promote implicit mergers and act as their vehicle, which is currently taking place in fact as seen by different agreements, particularly among derivatives exchanges.

2.6 Integration of Stock Exchanges

The most recent merger in Asia took place in 1999 when Singapore International Monetary Exchange Limited and the demutualized Stock Exchange of Singapore merged. The HKSE and HKFE underwent demutualization in 2000 to become divisions of the Hong Kong Stock Exchange. In terms of regulatory efficiency and effectiveness, liquidity, economies of scale, settlement risk management, and customer service, the Hong Kong Stock Exchange has improved its competitiveness. In order to deal with the region's increasingly complicated and competitive global environment, more consolidation is anticipated.

Traditional exchanges are creating cross-border mergers or strategic alliances as a result of competitive constraints. After the proposed merger between DB and LSE in 2000 fell through, efforts to integrate Europe's stock exchanges continued. In 2000, Euronext connected the exchanges in Paris, Amsterdam, and Brussels (Zwick, 2001). The launch of the euro and the appearance of more advanced trading equipment have accelerated the pace. Unlike either the German or London Stock Exchanges, Euronext was able to aggregate an annual equities trading turnover of more than $1.5 trillion. This integrated trading, clearing, and settlement system uses cutting-edge technology to increase trading efficiency and decrease costs, which is exactly what stock exchange consumers demand.

There are already discussions with a few other smaller exchanges, such Lisbon. According to Paris Börse, there will only be three or four western European stock exchanges left in a few years, down from sixteen.

Because it makes exchanges more comparable and integrated, the development and transformation of the securities markets and information technology is a significant concern in both Europe and the United States. Investors now face a market whose boundaries are becoming increasingly hazy. As a result, rivalry between stock exchanges as well as between exchanges and automated trading systems is growing (Pagano and Steil, 1996). (Domowitz and Lee, 1996).

Cooperation between nations is growing. In May 2000, Nasdaq established a joint venture in Europe. Additionally, it has ties to the stock exchanges in Canada, Hong Kong, and Japan. More recently, NYSE, the biggest competitor of Nasdaq, has been investigating the viability of a worldwide equity market that could connect exchanges in numerous nations, including France and Japan. One 24-hour market where the shares of the largest blue-chip companies in the world can be traded affordably and effectively is advocated as a realistic aim.

2.7 Theoretical Influences

2.7.1 Industry Dynamics

Figure 1 Porter's Five Forces Model The Porter's Five Forces model is a straightforward tool for analysing the dynamics of the competitive structure of the stock exchange. This model's dynamic force-on-force interactions are what make it so useful. In the context of a stock exchange, the five dimensions are: current industry rivalry in the stock exchange sector; threat of new entrants; relative bargaining strength of suppliers; relative bargaining power of buyers; and threat of substitutes. Within the stock exchange sector, they don't have comparable strength. Over time, their relative power might fluctuate. For instance, the use of open networks based on fixed and wireless infrastructure for business transactions is made possible by Internet technology (Amit & Zott, 2000). Porter (2001) updates the model to include this additional feature in light of the influence of the Internet. Stock exchanges can use electronic trading as a crucial component of their business plans if they can see the Internet as an addition to conventional trading methods rather than as a cannibal. The ability to receive orders based on pricing and priority of delivery over the Internet improves operational efficiency. The highest level of trading efficiency and transparency is provided by the instantaneous dissemination of bid, offer, and transaction prices. The bargaining power of suppliers and purchasers is more static and reflects existing facts, but other forces like the ongoing competition, the threat of new competitors, or the threat of substitutes are mostly of a dynamic nature and are based on expectations. Several elements, some of which are described in Table 2, affect the strength of each of the five competing forces.

The strength of these elements is evaluated in order to determine how appealing a market is.

Table 2

In this dissertation, the strategic scenario analysis is done using the Porter model. In order to determine the strength of a portfolio of companies, a corporation must examine its current strategic exposure. This is known as strategic situation analysis. With the use of such an analysis, the stock exchange is able to evaluate the competitive strengths (S) and weaknesses (W) of its business and compare them to the opportunities (O) and threats (T) presented by the five forces. The stock exchange's current capabilities and those required to establish, maintain, or develop a competitive edge in the market are not aligned, as shown by the SWOT analysis.

Due to the mismatch, the stock exchange must move forward with the strategic option analysis, a scenario-building approach to its future strategic stance. The three main strategic alternatives are organic expansion, mergers, and strategic alliances. The decision of a stock exchange is based on:

1. The degree of rivalry in the host market;
2. The accessibility of organisational resources for organic expansion; and
3. The capacity to use potential additional value.

Competitor power reinforced by

Construction of additional capacity will invite retribution from the current companies if the degree of competition in the host market is already high and there is excess capacity. In these conditions, a merger with an already-existing stock exchange will lessen this risk.
Furthermore, it's possible that the stock exchange lacks some of the tools and talents it needs to successfully compete in the host market. Faster access to these resources and capabilities is enhanced through merger or strategic alliance. The fastest way to create synergies is through merger. The difficulties are primarily post-integration issues.
Network Society

To concentrate liquidity, mergers are justified. The importance of liquidity is a result of network externality. The phenomenon known as "network externalities" explains why larger networks are more appealing to users than smaller ones (Federal Trade Commission, 2000). There are two key impacts of network externalities on both the old and new economies (Shapiro and Varian, 1999). Because more people will use a product the more attractive it is, demand-side economies of scale were what propelled the old industrial economy. This affects how competitive products fare in today's market. The economics of networks is what drives the new information economy. Positive reinforcement, which makes the strong stronger and the weaker, is the important idea. It is now a stronger force than ever in the network economy; this was also discussed in 2.5.3.

When a good becomes more valuable to one user, there are positive network externalities because other users get attracted to the network and are more likely to utilise the same good. By putting this idea into practise in the context of exchanges, more stocks can move to a single exchange, where the largest pool of liquidity will grow and assist current trades by enabling them to occur at more affordable prices. The more brokers who execute more transactions on one exchange, the more likely it is that other brokers and companies seeking to go public will be drawn to the exchange. Compatibility, compatibility, and coordination are thus crucial elements of a network in complementary fashion.

Domowitz (1995) creates a game between exchanges where traders can choose between two technologies (floor and automated trading), directly relating network externalities to exchange rivalry. In terms of trading, network externalities produce the liquidity effect, whereby the more traders that participate in a market, the less uncertain it is and the more liquid it becomes.

A corporation chooses the exchange with the best utility since it allows for the consolidation of more trading orders and the trading of more intermediaries, which increases liquidity. This is how cross-network externality works (Noia, 1998). An increase in the consumption of a good from the same network results in utility. Investors assume that the more liquid the market, the more aware they are of the company's securities, and the more effective the market is in terms of the speed at which information is disseminated and the promptness with which orders are filled. Markets that are highly connected, transaction-focused, and have a wide reach and a wealth of information are generally said to have a cross-network externality effect.

When a corporation favours a listing exchange where many other companies choose to be listed, there is also a direct-network externality (Noia, 1998). Businesses assume that such an exchange will increase the fairness, openness, and accountability imposed by sound corporate governance procedures while also denoting a high level of market quality. Additionally, the more products the exchange can afford to produce, the better services like clearing and settlement and information dissemination can be offered. Most crucially, when additional intermediaries join the same exchange, the market's volatility may be lower than that of a market with a relatively smaller number of highly connected listed companies (Hull, 1998).

2.7.2 Integration Strategies

Growth and expansion of an acquirer's assets, sales, and market share are obviously the immediate goals of an acquisition. A more fundamental goal is to increase shareholder value through acquisitions and give the acquirer long-term competitive advantages. Only when two businesses are worth more combined than they are separately does a merger bring value (Myers, 2000). It is presumable that mergers are carried out to reduce expenses, increase revenues, or open up prospects for expansion, with the ultimate goal of achieving synergies in human resources and decision-making processes. Changes in ownership and control are drawbacks of mergers. New responsibilities for the senior management are frequently outlined in the merger agreement.

Mergers are frequently divided into horizontal, vertical, and conglomerate categories. A horizontal merger happens when two businesses in the same industry combine.
The iX's intended formation is a recent example. Companies supplying various products in the same market are involved in a vertical merger. Companies that use this technique aim to go up the supply chain in the direction of the final consumer or backwards toward the raw material supplier. In a conglomerate merger, businesses from unrelated industries come together. The broadening of the product offers is its main goal.

Ansoff's Product-Market Matrix

The stock exchange's merger strategy is determined by its strategic decision (Sudarsanam, 1995). Market penetration strategy, as suggested by Table 3, tries to boost a company's market share in its current markets. Selling current products internationally is a component of market extension strategy. Given the comparable organisational framework, it might be a horizontal merger. When both businesses may exchange complimentary resources, value is created. A company can sell new products that are connected to its current products in its current market by extending its product line. To do this, a vertical merger is possible. A conglomerate merger results from a diversification strategy where the goal is in an unrelated industry.

Ansoff's product-market matrix depicts the deep complexity of factors that influence markets' levels of competition or that contribute to a firm's ability to compete. Examples of mergers with components of horizontal and vertical mergers come from case studies of the London Stock Exchange and the Hong Kong Stock Exchange, respectively.

Table 3 Ansoff's Product-Mark

3. Methodology

3.1 Aim of Project

This project's goal is to demonstrate the present and potential future growth of stock exchanges. They were originally thought of as public entities, but with growing integration and stock exchange mergers, they have transformed into profit-maximizing companies. to explain why they shifted and adopted a more aggressive and integrated strategy.

3.2 Objectives of the project

This dissertation's main goal is to examine the integration and competition tactics of businesses that resemble stock exchanges.

The thesis is concerned with:

1. Stock exchange industry dynamics;
2. The evolution of mergers on stock exchanges;
3. Integration tactics, as well as
4. Trends in future consolidation.

3.3 Why I am interested in this topic

My prior employment at a stockbroker sparked my interest in this subject because it piqued my curiosity about stock exchanges and how they develop, with many people (especially traders at the company) responding to their shifting competitive strategies and the continuous introduction of new technology. I wanted to further my grasp of this topic and determine whether the tendency had spread beyond of Europe.

3.4 Background

Exchanges have had to become more competitive as time has gone on in order to draw quality companies to list and intermediaries to trade; several of them have done this by demutualizing the member ownership arrangements they previously had. Demutualization plan participants are given shares of the exchange. They become exchange shareholders and are therefore potentially eligible for profit distribution. Since that time, exchanges have changed and are now commercially driven businesses with the aim of maximising shareholder wealth.

Cross-border business in Europe is becoming more and more common since the creation of the European Union. Investors in Europe are being encouraged to do more cross-border transactions in quest of lucrative business possibilities by the introduction of the euro and a wider use of equity as a financing mechanism. Nevertheless, despite the allure of international trading, the majority of stock exchanges in Europe are national organisations that exclusively deal in domestic, country-specific equities.

Rivalry is a competition between various exchanges working for the same objective. All exchanges and trading platforms aim to draw liquidity as their main objective. A marketplace for the exchange of assets at the lowest possible transaction cost is a requirement for an exchange to be competitive. Exchange charges and brokerage commissions are examples of direct costs.

According to Lee (1998), one of the characteristics of indirect costs is the lack of liquidity, which prevents the simultaneous purchase and selling of an unlimited number of assets at the same price and without delay. Deregulation of brokerage commissions also suggests a threat to trading as a source of income. An exchange has to entice more businesses to list and more intermediaries to trade in order to increase profitability.

3.5 The General Approach

The researcher's frame of reference, which refers to one's general knowledge, norms, and values, has an impact on the entire approach of a study (Wiedersheim-Paul and Eriksson, 1997). This project's methodology is built on the frame of reference, which functions as a personal scale. The specific scale of the investigation is impacted by the used theories and models. As a result, it is crucial that the researcher retain an impartial viewpoint. I have read a variety of theories and works in the field of my studies in order to become objective. However, it is challenging to take a totally objective approach because a significant amount of the literature and articles itself contain interpretations and viewpoints that can affect my judgement.

You can perform a research project using one of two different ways. One method is a deductive approach, in which you create a theory and a hypothesis and plan a research strategy to test the hypothesis. Another method is an inductive approach, in which you gather data and create a theory as a consequence of the study of that evidence. Since my study is primarily based on articles and I'm examining the evolution of stock exchanges and how their strategies have changed over time, I've opted for a logical approach. I will use current literature and models to test the empirical results.

3.5.1 Choice of Method

Both quantitative and qualitative methods are acceptable. A quantitative approach is defined, structured, and distinguished by being selective and separated from the information source (Holme & Solvang, 1996). The method, which is based primarily on numerical observations, seeks to generalise a phenomenon through a systematic study of selected data, with statistics indicators playing a key part. On the other hand, a qualitative method, which is structured less, aims to determine whether the data is generally reliable. The method tries to foster a shared knowledge of the topic being studied by using verbal descriptions rather than just numerical facts.

I have decided to use a strategy that is primarily qualitative with some quantitative elements in order to attain the goal. The survey I conducted in the form of an interview, which was aimed at active investors, brokers, and participants in two stock exchanges, is referred to as the qualitative method. Using the London Stock Exchange and the Hong Kong Stock Exchange as examples, I hope to ascertain through the interview whether mergers in Europe are more advantageous than those conducted elsewhere. Additionally, how each exchange competes and how technology and other elements are influencing exchanges' rising methods for competition. The outcomes of the interviews have been examined using the quantitative method.

3.6 Data Collection

The majority of the information for my study was gathered through an interview and research using published materials on the competition and integration tactics of stock exchanges.

3.6.1 Primary Data

Data that is acquired with a specific goal in mind and is necessary to complete secondary data is referred to as primary data (Widersheim-Paul & Eriksson, 1997). An interview with a private client broker, a member of an investment bank, and representatives from two stock exchanges served as the project's main source of data. One interviewer is from UBS, a Swiss Financial Services Corporation, while the other is from Brewin Dolphin Securities Ltd., a private customers broker. Additionally, I spoke with participants from the London Stock Exchange and the Hong Kong Stock Exchange. Three of the participants had the interview performed over the phone, while the other two decided to have the interview conducted by email. All 5 people in the interview voluntarily participated and answered the questions.

There are nine questions in the survey about whether stock market mergers are advantageous for all parties and whether they are a European phenomenon or are occurring elsewhere, including in Hong Kong. Macroenvironment, integration tactics, partnership and competition difficulties, the impact of technology on stock markets, the bargaining power of both buyers and suppliers, and future consolidation trends were all topics covered throughout the interview.

Known project management and consulting approaches were used to plan and carry out the project (Cope: 2000). (Maylor: 1996). Given the industry's rapid evolution, this was viewed as being vital. The qualitative data were analysed and evaluated using the framework of industry dynamics and integration techniques described in section 2.6 (Grant: 1998). (Doyle: 1998). Last but not least, merger problems and strategy selection were introduced (Hart, 1998).

3.6.2 Secondary Data

The term "secondary data" refers to previously compiled and condensed information about the issue at hand. This information comes from databases, books, journals, and the Internet, among other sources (Wiedersheim-Paul & Eriksson, 1997). The literature that has already been written about the topic at hand, notably journal articles and online data sources, is referred to as the secondary data employed in my research. The search for information focused on the relatively young and dynamic field of stock exchange competitiveness and integration plans.

The Coventry University Library and internet search engines were where the majority of the literature was located. I also borrowed books from the library, but they weren't very helpful because they were out of date and lacked the knowledge I required.

3.7 Criticisms of the Sources

There may be elements in the primary and secondary data sources that have an impact on the calibre of the study. To determine the overall quality of the study, one must also take the validity and reliability of the research into account.

3.7.1 Primary Data Criticisms

The interview I performed is useful since the information gathered is distinct and modern in character, and the questions may be created to precisely correspond to the topic under study. However, the interview is open to the respondents' arbitrary judgements. The responses reveal a person's subjective memory for particular past occurrences when they are asked about past and future events. The respondents' responses might have evolved as a result of specific recent or upcoming events, or they might have been influenced by others.

As a result, the responses provided by respondents may be skewed toward reflecting their opinions on the relevant subject. Brokers will also have a distinct perspective when answering the same questions as stock exchange members. In addition to certain respondents' time restraints and the stock market members' partiality toward their own companies' interests, which prevented them from being completely truthful; limits were also brought about by respondents' lack of interest and secrecy.

3.7.2 Criticisms of Secondary Data

Since stock exchange competition and integration techniques are a relatively recent topic, there are many different ways to interpret the literature that has been written about them. I have made an effort to approach stock exchanges objectively. The vast majority of secondary data is of a contemporary nature and is derived from articles. I therefore believe that my secondary data is really relevant.

3.8 Validity

If a study just includes the topics that one wishes to explore and nothing else, it has a high level of validity (Thuren, 1991). Validity is the degree to which the research's data gathering and data analysis accurately reflect the world under investigation. In my opinion, the primary and secondary data I have gathered are very relevant to the topic of stock exchange integration and competition strategies.
3.9 Reliability

Reliability shows that a study's processes, including the methods used for gathering data, may be repeated with the same results. In my situation, I spoke with brokers and participants in the London and Hong Kong Stock Exchanges. I believe the same interviewing process would be simply transferable to another similar group of interviewers in the same industry. As a result, I think the study satisfies the reliability requirements. The answers given, however, are prone to subjectivity based on the respondents' areas of expertise and perceptions of mergers in Europe and Asia. The responses might also be skewed to some extent by retrospective bias.

4. Qualitative Analysis

4.1 Analysis of Industry Dynamics

Figure 1 shows how the Porter's Five Forces Model shapes the dynamics of the industry. Due to a competitive market, strong providers (listed companies), cautious customers (intermediaries and eventually investors), weak substitutes, and high entry hurdles, an exchange is in a very vulnerable situation.

4.1.1 Industry Dynamics in the Porter's Five Forces Model

Source: Porter, 2001

Threat of Substitutes

ECNs pose a threat of substitution as ineffective replacements.

• Low-cost, commercial distribution methods.
• Mainly compete on price
• Take advantage of a market that is quote-lack driven's of service to try and consolidate liquidity.
• Stock exchange parasites.
• New substitution risks won't be brought about by proliferation in either Europe or the Asia-Pacific region.

Obstacles to Entry

High entry barriers

• Why trading alone makes it challenging to protect proprietary from new competitors like ECNs.

• Capital consuming.

• Exorbitant expenditures associated with preserving sound corporate governance standards and a stable market.

Bargaining Power of Suppliers (Listed Companies / Network Providers)

Listed Companies

• An increase in rivals broadens the selection of listing exchanges and gives listed companies more clout.

• Listed firms can approach investors through e-brokerage over the Internet, lowering the leverage of intermediary stock exchanges.

Network Providers

• Giving access to connectivity services.
• Powerful negotiating position in terms of technological expertise and bandwidth

Buyers Bargaining Power of Channels / End Users

Cautious customers (Investors)

• More choice, less loyalty.
• Lower switching costs over time.

Effective Online Brokerage Channels

• Improves bargaining power over traditional channels or eliminates strong member brokers

Rivalry Among Existing Stock Exchanges

A competitive market for stock exchanges

• Decreasing brokerage commissions increase competition.
• Dual listing removes regional restrictions and allows for a large number of participants to provide identical proposals and standardised goods and services.
• The pressure to increase shareholder wealth is increased as a result of demutualization.
• The transfer of listing responsibility to a different body is comparable to an ECN.

4.1.2 A Competitive Market

Numerous factors influence competition, including the availability of immediate services, price discovery, price volatility, liquidity, transparency, and transaction costs. According to the perspectives I gathered, there were two main causes of competitiveness. First, thanks to technical advancement, services may now be delivered more quickly and affordably thanks to connectivity to regulated stock markets. Second, the urge for more cross-border trading is being driven by the growing influence of retail investors. There are further regional factors. The liberalisation of brokerage commissions, according to a member of the Hong Kong Stock Exchange, was expected to increase competitiveness in Hong Kong.

Demutualization was seen by regulators to be the best method of tying profits to members who also owned equity in the exchange. This encourages them to maximise shareholder wealth and so raise the stock exchange's level of competition. Liquidity and transaction costs were of most importance to investment banks and brokerage firms.

Liquidity and transaction costs were of most importance to investment banks and brokerage firms. If there is no information asymmetry and an intermediary must choose which market to trade on, they will, on balance, select the lowest-cost market. When there are additional intermediaries, an exchange will be more appealing to an intermediary since, theoretically, the more intermediaries drawn to the exchange floor or automated system, the higher the liquidity. Additionally, increased liquidity draws additional intermediaries. The literature on cross-network externality supports this. Regardless of variations in listing criteria and securities regulation, liquidity draws businesses. Companies desire to list on an exchange where there are numerous other listed companies. The direct-network externality and this agree.
Increased consumption of a separate good that is sort of connected to the same network results in utility. Numerous empirical studies demonstrate that liquidity significantly affects the value of securities. According to Pagano et al. (1995), listing on a significant exchange might draw in a lot of investors by serving as free advertising for the business.

This idea was made by Merton (1987), who demonstrated it in a capital-asset-pricing model with imperfect information by demonstrating that stock prices increase when investor awareness of the company's securities increases.

"At the same time, firms might choose to list on an exchange with a large number of listed firms (direct network effect), as it might be a sign of the market's quality or because they expect that there will be more intermediaries there and the variance of such a market may be lower than that of an exchange with a very small number of highly correlated firms. The more listed companies and trading intermediaries there are on a certain exchange, the greater value being listed has for a company. When all other factors are equal, a company will want to list on reputable exchanges with a large number of other listed companies because the market is more liquid when there are 100 listed companies as opposed to ten, and there are more trading intermediates available.

4.1.2 A Competitive Market

Network Providers

To provide physical connectivity services to an exchange, network providers are utilising their expertise. They are required to develop the foundation of the trading system for an exchange. They have considerable technical expertise and bandwidth. Initial outlays are enormous. They are able to secure stock exchanges that require them for on-going trading system maintenance and software upgrades in the future.
Listed Companies

Listed businesses make poor suppliers. A market influencer in the securities and futures industry stated that initially businesses prefer to list domestically since their clients and suppliers are more familiar with them. Regulators and investment banks/brokerage firms concurred that firms' negotiating power was minimal when selecting their primary listing exchange, but increased when selecting their secondary listing exchange, which is consistent with literature. They will take into account a trade that:

• A crucial number;

• The market's standing for effectiveness and quality;

• The aptitude for luring money.

In addition to the aforementioned, investment banks and broker-dealer businesses are better positioned to comprehend the demands of companies because they are particularly focused on the listing process, following disclosure obligations, securities legislation, and investor protection.

The literature that claimed dual listing was redundant and impractical since listed companies had to adhere to two sets of regulatory requirements, accounting standards and securities legislation, increasing their indirect costs, served to further bolster the weak negotiating position of businesses.

4.1.4 Bargaining Power of Buyers


Investors cannot tell the difference between an ECN and a monopolistic exchange in an order-driven market as long as the identical order is automatically matched and executed at the best price. Investors do not select a specific exchange if the stock they wish to purchase exclusively lists there, the broker business stressed.
Brokerage businesses came to the conclusion that the key factors in an investor's decision to choose a broker were accessibility to market information, ease of execution, and cheap transaction fees.

Financial intermediaries of all stripes take on greater and more risk management tasks (Allen and Santomero, 1996), which are lucrative and can replace other revenue streams that are sharply declining owing to the restructuring of financial markets (such net interest income). They are now able to trade (directly or through subsidiaries) as broker dealers on stock exchanges thanks to evolving legislation and new technologies.

Nowadays, intermediaries have a choice in where they transact. Because it is more appealing for diversifying their own portfolios and the portfolios of their customers, they might find an exchange with more financial goods listed to be more fascinating.

However, despite competition in charges and spread, intermediaries may find an exchange with many more intermediaries more appealing because they should help the market by providing liquidity. The selection of where to establish an intermediary is influenced by six criteria. Brokerage commissions, trading goals like speed and accuracy, legal constraints, economies of scale, network externalities, and improvements to order routing tools are some of them. Similar to publicly traded firms, intermediaries seek to trade on an exchange with a large number of other intermediates who can progressively increase market liquidity. The literature on positive network externality supports this.

This is also advantageous to an exchange since it can compete to draw more middlemen to the floor or to its automated system. The more middlemen, the higher the connection fees, and the larger the client base, the higher the trading commissions. Exchanges draw as many middlemen as possible in order to increase their effectiveness, quality, and reputation. While the latter draws more businesses with even bigger market capitalization to list on a more liquid exchange, the former improves scales of economies in the supply of transaction services.

New Channels

Online brokers have recently developed to compete with conventional brokers. Their expansion was place without significant opposition from conventional brokers, notably at a time of rapidly increasing stock market activity, stagnant customer base growth, and the development of Internet channels. As a result, the vast majority of active self-directed investors have already moved their trading online. A director of a multinational firm thus believed that a typical broker needed to specialise in order to compete in various market niches. One sector would be retirees who preferred stand-alone delivery of goods and services to a combination of personalised services and physical locations; another could be those in their middle to late twenties who were not financially stable but had a high potential for future income growth. The conventional powerhouse brokerage firms are aggressively exploring online methods as they quickly become aware of the possibility of direct retail brokerage services. And a lot of people are doing it globally.

Although brokerage companies in Asia asserted that e-trading only generated a small amount of turnover, European investment banks generally agreed that new online brokerage channels had greatly strengthened buyers' influence in Europe. Brokers must use a combination of traditional and online techniques to cater to the needs of varied clients. They can use financial platforms on the internet.

Additionally, they can modify the services to fit particular market niches, such as automated guidance, online financial planning, longer trading hours, and research delivery.

4.1.5 Inefficient Substitutes

The functions of an ECN are contrasted with those of the current electronic trading system in Table 4. These are well-established alternatives to the trade proposition from the viewpoint of an intermediary. However, as indicated in Figure 2, the interviewees generally believed that the ECN resembles a low-end outsourcing trading function.

As a result of lesser liquidity, increasing transaction costs might rapidly outweigh the advantages of outsourcing (Teece: 1986). In actuality, the savings in IT personnel and resources may be negligible in comparison to trading volume and monitoring expenses (Williamson: 1985).
Additionally, the majority of the viewpoints I gathered appeared to concur that the business model resembled an order-driven market, as is the case in Europe and the majority of East Asian nations. Uptake in these nations was essentially flat. Investor caution brought on by uncertainty and lack of trust has resulted in a lower acceptance rate than expected. They were worried about the value and service quality. The inability of the ECN to attract liquidity and the lack of price transparency worried investment banks and brokerage businesses.

Table 4 - ECN versus Traditional electronic trading platform

Note: New functionalities are highlighted in italic.

Figure 2 - Ansoff's Product Matrix

4.1.6 High Barriers to Entry

The idea that a national stock market is a monopoly by natural law is no longer valid. Stock exchanges are now commercial enterprises rather than public utilities. If an ECN wants to be registered as an exchange, it must meet a number of criteria, including having enough financial resources and following rules and regulations that guarantee an orderly market and provide investor protection.

Alternative trading systems, new exchanges, and established exchanges have all entered the market as new participants in an effort to draw listings and international trade to their marketplaces. All participants in the discussion agreed that only the most effective exchanges—those that provide trading in stocks from all over the world and provide the most cutting-edge and aggressive financial instruments—should endure in the long run. Academics believed that stock exchanges were resource-wasting and redundant because they used the same fundamental trading mechanism. This was particularly true in Europe, where after 1996, the growth of distant membership access clearly made cost-effective cross-border trading possible and removed key obstacles to the development of a shared and expanded pool of equities market liquidity. The market would become even more integrated if there was a single European currency. However, persistent discrepancies in law and regulation posed significant challenges to mergers at the national and international levels, ultimately leading to the formation of a transnational exchange. Academics asserted that there have been continuous disagreements regarding a common set of regulations between LSE and DB following their regional merger.

4.2 Case Studies

4.2.1 International Exchange - London Stock Exchange: A Prototype of Horizontal Merger

The first recorded instance of share trading in the United Kingdom dates back to 1760, when 150 brokers who had previously belonged to the Royal Exchange established a club at Jonathan's Coffee House to buy and sell shares. The club's name was changed to Stock Exchange by a vote of the members in 1773. The Big Bang of 1986 caused a significant upheaval in UK securities trading. The biggest impact was the cessation of single capacity trading and the opening up of dual capacity operations for market makers. Brokers purchased and sold securities on behalf of clients in single capacity trading, whereas jobbers maintained stocks of securities that they purchased and sold to brokers. After 1986, market makers were able to act as jobbers and deal with investors directly, cutting off the middleman broker.
The minimum commission rate was eliminated. Instead of trading on the floor, it is now done from separate dealing rooms through computer and telephone. To improve market speed and efficiency, Stock Exchange Electronic Trading Service was introduced in 1997. The settlement meant that CRESTCo, a new electronic share-settlement service provider, took over LSE's operation. LSE went public in July 2001 after converting to a public limited company in 2000. The Frankfurt Stock Exchange was founded in Germany 223 years ago as a private organisation run by several businessmen. Frankfurt currently leads the German stock market, with a total volume of almost 5,200 billion euros in 2000. The full range of services and system applications, from trading in securities and derivatives to clearing, providing market information, and developing systems, are all included in DB. The Xetra trading platform in particular has elevated DB to the position of second-largest fully electronic cash market globally.

From LSE's standpoint, the proposed merger to create iX is reviewed. The LSE SWOT analysis is summarised in Table 8.

Table 5 - SWOT Analysis of LSE

Building Market Credibility

LSE was looking to form more partnerships with its rivals in Europe and other places in order to continue establishing its market credibility and to eventually establish a Pan-European stock exchange. This is consistent with EU strategy, which seeks to liberalise market access and establish a unified European financial services market.


The number of cross-border transactions is rising as institutional and ordinary investors' investment strategies shift to a sectoral rather than a geographical investing focus. LSE aspired to promote liquidity and price transparency while consolidating trading volume in the fragmented European equity market.


The LSE intended to unite in order to create a unified trading platform with superior order routing capabilities, which would increase efficiency. Additionally, a merger might make it possible to share current technology, cutting down on transaction expenses.

(ii) Merger Strategy

LSE and DB's merger to create a new entity to be known as International

On May 3, 2000, Exchange, also known as iX, was originally launched. The initial merger discussions between LSE and DB took place in July 1998 as a result of growing customer demands and competitive pressure. With the aid of market harmonisation across Europe and the ease of a single passport licence, LSE seeks to create a joint trading platform with DB. The headquarters of iX would be in London, with its main operations being in Frankfurt.

In an effort to establish a durable competitive advantage, LSE chose a horizontal merger to address the mismatch between the resources, competencies, and opportunities available to both exchanges. It is possible to significantly reduce the duplication of use of resources, including the infrastructure for trading, R&D, and surplus operating capacity. Additional resources that manifest as strategic assets, such as market dominance and entry obstacles like the experience curve or size, can be improved.

The particular abilities of an exchange, such as its architecture, ability for innovation, and reputation, can produce a long-lasting competitive advantage.

iii) Mergers Challengers .

The merger of the Frankfurt Deutsche Boerse with the London Stock Exchange (LSE) was announced for 2000. The two were supposed to collaborate with Nasdaq to establish a Frankfurt-based exchange for high-growth European equities.

The technological issues at LSE were brought to light by the merger, which hurt the company's reputation and was one of the main reasons they were unable to finish the integration.

The issues with LSE date back several years. It and Deutsche Borse sought to create an uniform European trading platform two years before to the planned merger, but they were unsuccessful. Gavin Casey, the outgoing chief executive of the London Stock Exchange, has come under fire in European newspapers for failing to put in place a stable electronic trading system—two multimillion dollar attempts at electronic trading failed—and for failing to raise the exchange's profile in the face of increased competition.

Political obstacles and competing interests among the partners prevented the idea of a pan-European market from really taking hold. According to an LSE member, First, there are significant political impediments. The national regulatory parties resisted ceding their authority and clearly established national jurisdictions. This was supported by the literature, which noted that nations would want to keep their stock exchanges with their established reputation and source of income.
Second, even though all settlements could be made in euros, each stock exchange had its own clearing and settlement system that operated in its own jurisdiction. This implies that any further delay in settlement would incur further financial costs.

Third, from an economic perspective, stock exchanges are businesses that demand significant expenditures in technology. The possibility of creating economic synergies as a result of the merger is not assured.

Costs to LSE

A broker I spoke with thought that the low offer price was caused by the LSE's undervaluation. Even if the merger had gone through, the LSE would have had to pay a significant transitional fee to connect with Xetra, the proposed German trading system. The LSE member emphasised that there was relatively little market size that could be enhanced through merger per unit effort. Additionally, he asserted that because of LSE's size, a merger with a stock exchange with a similar market size would be challenging. In Europe, 55% of all stock trading volume is conducted on the LSE. The LSE can earn a maximum of 9% from Switzerland, 7% from Italy, 5% from Spain, and 3% from Sweden if it joins with the most important and active European stock exchanges. To the LSE, such a distinction is inconsequential.

Regulation and Compliance

It might be argued that the combined company would potentially increase regulation and compliance rather than necessarily streamlining the listing and flotation process. Academics believed that there was still some debate on whether a cross-listed firm should be subject to the regulatory requirements of either its country of origin or both. Any firm wishing to list its shares on the LSE would just need to adhere to German regulations, according to DB's proposal. The Financial Services Authority vigorously opposed this idea, demanding that all share trades in the UK be subject to UK regulations regardless of where the initial stock exchange was located. As mentioned above, worries about regulatory harmonisation and the possible magnitude of running costs led to the official withdrawal of the iX merger plan.

4.2.2 Hong Kong Exchanges and Clearing Limited: A Typical Model of Vertical Merger

Reports of stock trading in Hong Kong go back to the middle of the nineteenth century. The Association of Stockbrokers in Hong Kong, the first official market, didn't start operating until 1891; in 1914, it changed its name to Hong Kong Stock Exchange. The Hong Kong Stockbrokers' Association, a second exchange, was founded in 1921. These two exchanges united to become the Hong Kong Stock Exchange in 1947 with the goal of rebuilding the stock market following World War II. Three further exchanges were established as a result of Hong Kong's swift economic development: the Far East Exchange in 1969; the Kam Ngan Stock Exchange in 1971; and the Kowloon Stock Exchange in 1972.

To tighten market regulation and integrate the four exchanges, HKSE was established in 1980. On April 2, 1986, trading on the new exchange began using a computer-assisted system. The Hong Kong stock market was the second largest in Asia and ranked tenth in the world by capitalisation as of September 2000.
The HKFE was founded in 1976 to offer more than 130 participating organisations, many of which are connected to international financial institutions, efficient and diversified markets for trading futures and options contracts. The futures and options markets for a wide variety of goods, including equity index, stock, interest rate, and foreign exchange, are operated by the derivatives market under HKFE. In a liquid and well-regulated market, it maintains a strict risk management system that enables participants and their clients to meet their investing and hedging demands.

In 1989, the HKSCC became a legal entity. It was the primary counterparty for all CCASS members when it established the Central Clearing And Settlement System (CCASS) in 1992. Share settlement follows the T+2 mechanism and is done on a continuous net settlement basis by electronic book entry to participants' stock accounts in CCASS (the second trading day following the transaction).

The merger is examined from HKSE's viewpoint. See Table 6:

Before the finance secretary of the Hong Kong government announced the reform of the securities and futures market in March 1999, the settlement and clearing services, trading of derivatives, and trading of stocks were handled, respectively, by HKSE, HKFE, and HKSCC. The 1997–1998 Asian financial crisis had a significant negative impact on Hong Kong, which had long been regarded as the region's financial flagship. Hedge funds attacked the Hong Kong Dollar's peg to the US Dollar in August 1998 and succeeded in accumulating sizable positions in both the stock and futures markets. Because HKSE and HKFE were independent of one another, regulators and government representatives were unaware of this. They were self-regulatory businesses that infrequently shared information and transactional data. The government discovered anomalies in the settlement policies as it worked to cover the short positions in the stock market intervention. HKFE required the settlement of futures on a T+3 basis, whilst shares traded on HKSE were settled by T+2 (the second day after the trading day) (the third day following the trading day). Such incompatibility resulted in higher borrowing expenses.

The following highlights additional factors that led to the merger, in addition to the policies of both are being aligned:

Acquisition of liquidity pool

Regulators, brokerage houses, and academic research all held the solid belief that a liquid exchange could draw top-tier businesses. Since more orders will be aggregated for execution as a result of more high-quality firms, this is consistent with positive network externalities.
Commercially driven business

According to a member of HKEx, the government wanted to combine the many markets that were before operated as cosy brokers' clubs and administer them as shareholder-owned corporations.

Elimination of inconsistency in product development

In the process of creating new products, a disagreement developed between HKSE and HKFE. For instance, due to their strong correlation with the underlying shares, warrants, which are typically traded on futures exchanges, are HKSE products. Since the main difference between the HKSE and HKFE markets is the goods, they aren't really competitors. The operating system is the same even when the product is artificially separated.

Economies of scale

The government wants to avoid duplicative investments in trading and computer systems and gain economies of scale in research and development. This is crucial if Hong Kong is to maintain its status as a hub for Mainland China's international capital formation.

ii) Merger Techniques

The merger was mostly driven by the government. The exchanges will be combined as part of this vertical merger, and they will pool their resources to work toward shared goals:

1. Eliminate inconsistencies in the application of settlement policies and improve product development cooperation.

2. Reduce resource duplication in serving overlapping markets.

3. Develop market clout to establish the Asian time zone as a mainstay of the international securities and futures markets; and

4. Become the go-to Asian partner for significant exchanges looking to forge worldwide partnerships.

As part of the reform, the clearing houses HKSE, HKFE, HKSCC, and two more clearing houses amalgamated to become HKEx after demutualizing and merging. The merger was finalised on March 6th, 2000, and on June 27th, 2000, HKEx introduced its shares to the stock market.

iv) Problems with mergers

Market reforms started out slowly because local brokers, who make up the bulk of brokerage firms in Hong Kong and only have a few hundred clients, were badly hurt by the 1997 stock market disaster because of irrecoverable margin financing borrowings. They opposed any move that may put their company at even greater risk.
The most difficult task was also combining two trading systems because it required a lot of work and money to execute user acceptability testing and rollout operations.

4.3 Implications and Discussion

i) Strategic Choice

Both instances suggest that a merger is an obvious strategic choice to accomplish the aforementioned goals. Although the method of strategic analysis is rather broad, considerations unique to a particular nation or region are what ultimately determine which course of action to take.

For instance, competition among the stock exchanges in Europe focuses more on technological cooperation than anything else. The primary focus in Asia is the idea of creating a whole financial services organisation within each area.

Exchanges have realised that they must become traded firms themselves in order to respond commercially to competitors. DB was now traded and listed. Previously, in July 2001, London demutualized and went public. In June 2000, the clearinghouses, HKFE, and HKSE were merged into HKEx. All respondents agree that, although there may be fewer trading systems in three to five years, there will likely be fewer clearing and settlement processes.

ii) Consolidation Obstacles

Although the investigation covered some national and regional features of consolidation, the idea does not appear to be universal for the following reasons:

1. Thanks to technology, intermediaries may now provide investors with services at a significantly cheaper cost and without being confined by national borders.

2. Regulators underlined that because each stock exchange serves a different market, it would be expensive to balance all of the interests of the numerous market user groups. Cross-border mergers in particular necessitate the balancing of regulations from several jurisdictions.

3. Because the cost of capital might be quite high, the major expense of the transaction is the delay in settlement. Because investors would be able to trade at more affordable costs as a result of the deregulation of commission, transaction fees are not very important.
Exchanges are creating infrastructure links to support mergers or alliances at the back end after spotting a possible opportunity.

4. The stock market is a national resource. Political parties will not agree to share a set of laws and regulations from several jurisdictions or give up their dominant position in a merger.

iii) Patterns of Merger

The LSE and HKSE have adopted policies of horizontal merger and vertical merger, respectively, in response to the growing competition. Europe was going through a period of fierce struggle between two convergence theories. Many market participants were persuaded that domestically regulated financial markets were antiquated and uncompetitive by the emerging development of a pan-European market with a common currency. The horizontal merger paradigm is being promoted by the European Securities Forum. A more open architecture along three functional levels—trading, clearing and settlement, and custody—replaces national exchanges in this paradigm. Through a single point of entry, each market participant can so receive remote access to a variety of pan-European services.

The basic presumption is that only the most effective exchanges should endure over the long term, trading equities from other European nations and providing the most cutting-edge and aggressive financial instruments. Another merger concept is the fusion of the depository, clearinghouses, and exchanges within a single nation. Traditional exchanges are typically attracted to this strategy. They understand that trading does not create enough revenue on its own to compete with other less expensive Internet-based alternative trading platforms, which is why they want to establish a whole financial services organisation. Additionally, buyers and sellers can now trade and settle transactions outside of exchanges and clearing houses.

Due to the absence of enablers like a single currency, consolidation across borders in Asia has not occurred as much as it has in Europe. Furthermore, given the generally low trading activity in most Asian nations, the claim that a merger will considerably attract liquidity is not very compelling.
HKEx and LSE have continued to meet the demands and overcome the hurdles despite the aforementioned uncertainties or obstacles. They are more aware than ever of the need to put their strategies into practise in a variety of ways.

5. Conclusion

The research has shown that the stock exchange sector is extremely dynamic and rapidly changing. Since stock exchanges were previously legal, public or private monopolies, competition among them is a relatively new phenomena. ECNs, incumbent exchanges, and new exchanges are all in competition with one another in order to attract liquidity. The conclusions have a number of ramifications.

First, through partnerships and links in technology, exchanges influence the globalisation of capital markets. Through business development activities and appropriate mergers, acquisitions, joint ventures, and alliances, stock exchanges hope to expand their current operations and broaden their scope. The most practical strategic option for stock exchanges among these is a merger. It provides a tactical advantage when "speed to market" is crucial, in addition to being the fastest way to enter a new market. When two value chains are rearranged to produce or enhance the competitive advantages for the merged business, the merger can realise any anticipated synergies. One or both value chains may need to be changed as part of the reconfiguration process, most notably in the organisational structure changes and new management responsibilities. Second, different merger types are motivated by various value creation objectives. A stock exchange should be able to choose a target exchange that will aid in achieving its strategic goals and adding value after conducting studies of its strategic situation and strategic decision. The vertical merger was used by HKSE to considerably reduce infrastructure expenses for both exchanges and share resource consumption. A single passport and a shared currency in Europe made it easier for LSE to employ a horizontal merger to expand geographically.

Further consolidation would appear to be advantageous, though, as stock exchanges can benefit from economies of scale, increase market liquidity, and draw more investors.

However, given the state of the economy right now, vertical integration in line with investors' preference for domestic markets seems to be a sound business plan. Merger discussions will soon start once a steady economic outlook can be determined. In the long run, there might be a single global stock exchange for blue chips and national specialised exchanges for other market categories. But first, Europe needs to do a much better job of harmonising its laws and regulations.

Thirdly, there is an intriguing convergence among all the viewpoints I have gathered, most notably that they disagree with the literature on the potential for future stock exchange consolidation. There is a general consensus that the clearing and settlement systems will cooperate strategically and reach greater technological agreements. Strong market competitors will never try to reach arrangements with weaker competitors. This supports the claim made by the regulator that LSE favours incompatibility since, on the one hand, it already has a sizable network to generate its own liquidity and is hesitant to cede its dominating position to other exchanges in a merger.

Consolidation among exchanges should be expected given that institutional investors' and investment banks' mergers have increased demand for global access to exchange facilities. Political factors, however, prevent the compromise from creating a unified set of regulatory norms. It is unlikely that the transaction levy will be reduced in price up front, especially in light of the deregulation of brokerage commissions. As exchanges look to achieve economies of scale, consolidation is therefore anticipated to continue in the form of collaboration among clearing and settlement providers and strategic alliances in technology innovations.

Fourthly, the US has mostly been the source of ECN's expansion. The US exchanges, particularly Nasdaq, are criticised by European and the majority of Asian exchanges for not creating central limit order books, which concentrate liquidity and reduce execution costs. These exchanges created order auto-matching techniques as a result of converting to electronic trading in recent years, which allowed them to reject incoming ECNs. Furthermore, the largest pool of liquidity was already under the jurisdiction of these established exchanges. For ECNs to survive, price competition alone is insufficient, especially in light of the liberalisation of brokerage commissions.

Finally, from the standpoint of the investor, the operation of an ECN is identical to that of an order-driven trading system. Even while these crossing networks are less expensive, they do carry some dangers from the standpoint of the efficiency of the capital market as a whole. If intermediaries migrate their trade from exchanges to ECNs, liquidity suffers. A growing amount of value-based securities transactions will be impacted by a declining portion of the entire market. It is obvious that liquidity will decrease, prices will become more volatile, and smaller deals will ensue if the prices dictating trades become fewer. Risk and equity capital costs will consequently increase.

Many of the questions discussed in this dissertation lacked clear-cut solutions, necessitating the use of additional analytical judgement. Among other things, the following issues will need more clarification and might be left as more in-depth research topics:

1. The rationale behind the presence of the two distinct systems, order-driven and quote-driven, as well as when and when one may take precedence over the other.

2. Consolidation at the clearing and settlement levels: costs and advantages.

3. The likelihood of creating strategic alliances or cooperative agreements with ECNs.

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