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Discussion

Published online by Cambridge University Press:  04 August 2010

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Summary

As the twelve nations of the European Community (EC) advance toward 1992, the forces favouring evolution and integration of financial markets will mount. Ahead of these changes, it is useful to consider the experience of financial markets in the United States and to ask whether any lessons stand out regarding market microstructure and market organization. Yakov Amihud and Haim Mendelson have focussed their attention on several general themes (market centralization versus fragmentation, the creation of liquidity in markets and priority trading rules) and on the specific approach adopted for linking securities markets in the United States, the Intermarket Trading System (ITS). Amihud and Mendelson characterize the ITS as an order-routing system (as distinct from an order-matching system) with several serious deficiencies that make it a poor model for the European Community to follow. The authors present their own proposal that accommodates geographically dispersed financial markets by integrating them via several systems – a portfolio management subsystem, an order execution subsystem (based on a central limit order book), and a clearing and settlement subsystem that utilizes EC-wide clearing and a new mechanism for executing orders simultaneously, the ‘clearing transaction’.

The authors' basic observations about geographically dispersed markets are surely correct. An industrial economy benefits by having efficient capital markets with high liquidity and low spreads. There are gains from market centralization but the centralized market needs a credible competitive threat, in this case from either inside or outside of the EC. And, as for the specifics of the trading system, I completely agree that the ITS is an anachronism that makes poor use of present day technology. Market participants need the freedom to route orders where prices are most favourable.

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Publisher: Cambridge University Press
Print publication year: 1991

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