Latin American Capital Markets

200 RUBEN LEEcheaper access to its products than would otherwise be available.The presumed costadvantage of an exchange-sponsored linkage may, however; be less than anticipated. Ifan individual firm at one exchange does enough business at another exchange, it maypay the firm to establish its own dedicated link to the second exchange, rather thandeal via an exchange-sponsored linkage. If a sufficient number of firms do this, theexchange-sponsored linkage will not attract enough order flow to cover its costs. Similarly,if a larger firm that has direct access to both markets buys the firms trading onone exchange that has a linkage with another exchange, the trading firms may have noneed for a link between the two exchanges because internal linkages will be sufficientTwo or more cooperating market structure institutions may realize manyother types of efficiencies. Economies of scale may be available to both, if their sharedcosts in joint facilities are less than the sum of their separate costs would be.This mayoccur in investment not only in physical facilities but also in such intangible items asmarketing, education, and product development. A link between two markets thatoperate sequentially in different time zones may reduce the risks incurred by marketparticipants. The ability of traders with positions at one exchange to liquidate theirpositions on the other exchange, for example, means that they will face lower timingrisks than if they were not able to liquidate their positions on the second market andhad to wait until the first one was open again to do so. Linkages between CCPs mayreduce the costs of maintaining offsetting positions on both CCPs, such as the needto pay two margin requirements. A linkage may also allow cooperating exchanges tobenefit from a network externality associated with the attraction of order flow. If thelinked exchanges are able to combine the order flows they receive for similar productsin a manner that is unavailable without a linkage between them, they may togetherbe able to achieve a more liquid market than either would be able to realizeseparately.When considering what the cost savings might be from a cooperative projectbetween market infrastructure institutions, it is vital to conduct a full cost-benefitanalysis. Without such an assessment, it would be easy to overestimate the potentialgains from such projects, a mistake that has frequently occurred in practice.Mergers can also be extremely costly both in terms of transition expensesand the amount of management time needed to make them successful. Indeed, it iswell known that mergers are typically not cost-effective for shareholders. Mergersmay also be costly and hard to complete successfully if the negotiating parties areevenly balanced in economic strength; if significant differences exist in their business,operational, or technical models; if their respective shareholders have competing economicinterests; or if they have overlapping capabilities or different organizational cul-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub