Economies of scale and scope in financial market infrastructures

• Published in: Journal of international financial markets, institutions & money Vol. 53; pp. 17 - 49
• Main Authors: Li, Shaofang, Marinč, Matej
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.03.2018
• Subjects: Central securities depositories; Clearing houses; Economies of scale; Economies of scope; Horizontal integration; Stock exchanges; Systemic risk; Vertical integration; Central securities depositories; Economies of scope; Horizontal integration; Stock exchanges; Clearing houses; Economies of scale; Systemic risk; Vertical integration
• ISSN: 1042-4431; 1873-0612
• DOI: 10.1016/j.intfin.2017.09.010

•We confirm economies of scale in financial market infrastructures (FMI).•Economies of scale are positively related to vertical and horizontal integration.•Efficiency in FMI increases with vertical (but not horizontal) integration.•Efficiency in FMI increases with a focus on a narrow range of asset classes.•We also analyze implications for systemic risk. This article confirms the existence of substantial economies of scale in trading and post-trading financial market infrastructures (FMI), using the panel data of thirty stock exchanges, twenty-nine clearing houses, and twenty-three central securities depositories from thirty-six countries. We show that economies of scale are positively related to size and vertical and horizontal integration of FMI providers. Economies of scale are significantly higher in North America than in other regions. When analyzing economies of scope, we show that the efficiency of FMI providers increases with vertical (but not horizontal) integration and with a focus on a narrow range of asset classes. We also analyze implications for systemic risk.