Financial markets performance

The recent spree of alliances, joint ventures, and mergers between exchanges prompts the requirement to explain the underlying rationale behind this activity. Increased competition from automated trading systems with lower transaction costs and remote access capabilities and, for European exchanges, the pressure to transform into supra-regional players in light of upcoming EMU may be the most visible drivers. However, in the medium to long run, size alone may not guarantee survival. A consolidated financial market can only excel if ist overall performance in terms of (1) market liquidity and market depth, (2) market volume and market activity, (3) price efficiency and sped of adjustment, (4) market stability, and (5) transaction costs and bid-ask spreads is superior or at least comparable to the local markets which currently dominate trading. In this text, market performance at DTB, the German options and futures exchange which appears to have chosen a rather proactive approach towards consolidation of European financial markets, is analyzed using the above mentioned performance measures. Further, fast market conditions are analyzed within an asymmetric information framework and policy issues to cope with near market failure conditions as seen at NYXE during October 1997 are discussed.