International Linkage of securities exchanges is an idea unheard of not long ago, but whose time has come quickly. Since 1984, five different links have been created between United States securities or commodities exchanges and counterparts abroad. Three other links have been proposed, and several more are being informally discussed. At the same time, financial firms are investing in in-house international trading technology. The exchanges are battling the development of these in-house trading links for the expanding business in international securities and commodities trading, attempting to persuade traders to use linked markets rather than their own internal connections. “Each exchange is involved in a bitter struggle with every other exchange for that most precious of financial commodities: liquidity. If an exchange loses it – either to other exchanges or to the growing telephone market – it is dead.”
This rapid development suggests that markets are linking to fill an existing demand and to stimulate active trading. Experience to date, however, has not borne out this assumption. Table 1 indicates the volume of trading through 1986 in the three currently-operating securities market linkages; Table 2 indicates the same information for the two commodities market linkages. Although a large number of trades do occur, the volume is not significant.
This trading experience indicates that market linkages have not been developed in response to existing or articulated demand. The rush to develop international trading systems, therefore, is not motivated by the exchanges’ desire to capitalize on traders’ existing need of, and consequent willingness to pay for, an international marketplace. Assuming that development of these links is not cost-free, and also assuming that the exchanges involved are profit-maximizing firms, they must anticipate some future demand for these services in order to justify the present investment in linkages.
This Article explores the economic theory of market development and applies it to the international marketplace, in an attempt to determine why market linkages are developing in the absence of apparent or articulated demand. Part I chronicles the development of the five existing market linkages. Part II discusses economic theories of market development and applies them to these international market linkages as well as an existing domestic model of market linkage: the Intermarket Trading System. Part III discusses the various regulatory issues raised by international market development.
Charles C. Cox & Douglas C. Michael, The Market for Markets: Development of International Securities and Commodities Trading, 36 Cath. U. L. Rev. 833 (1987)