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Banks' shareholding in multilateral trading facilities: A two-sided market perspective

Author

Listed:
  • Delphine Lahet

    (LAREFI - University of Bordeaux)

  • Anne-Gaël Vaubourg

    (LAREFI - University of Bordeaux)

Abstract

This paper aims to account for the observation that banks are both owners and clients of Multilateral Trading Facilities (MTFs) which were created in Europe after the implementation of the Markets in Financial Instruments Directive (MiFID). Using a duopoly model of two-sided markets, we demonstrate that banks' participation in MTFs crucially affects their objective function shape, pricing policy and profit. We establish that when brokerage and trading activities are particularly important for banks' revenue compared to their profit as MTF operators, some market outcomes may emerge, whereby both MTFs include banks' interest as clients in their objective function. In these situations, although they earn negative profit as shareholders, banks benefit from lower fees as MTF's clients. This situation eventually results in larger global revenue. This effect may explain why banks are behind the creation of MTFs and why they maintain their stake despite negative profit.

Suggested Citation

  • Delphine Lahet & Anne-Gaël Vaubourg, 2015. "Banks' shareholding in multilateral trading facilities: A two-sided market perspective," Economics Bulletin, AccessEcon, vol. 35(3), pages 1949-1960.
    • Handle: RePEc:ebl:ecbull:eb-14-00815
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    File URL: http://www.accessecon.com/Pubs/EB/2015/Volume35/EB-15-V35-I3-P198.pdf
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    References listed on IDEAS

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    1. Johannes A. Skjeltorp & Elvira Sojli & Wing Wah Tham, 2012. "Identifying cross-sided liquidity externalities," Working Paper 2012/20, Norges Bank.
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    Cited by:

    1. Lahet, Delphine & Vaubourg, Anne-Gaël, 2017. "Bank ownership of multilateral trading facilities and implications for historical exchanges: An industrial economics approach," Economic Modelling, Elsevier, vol. 65(C), pages 9-17.

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    More about this item

    Keywords

    multilateral trading facilities; two-sided markets; banks;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • G2 - Financial Economics - - Financial Institutions and Services

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