Swiss Silos
The Swiss exchange SWX and the Swiss clearing group SIS have announced their intention to merge. (The data and financial transaction services provider Telekurs will be part of the merger too.) The merging firms state that the pressure to innovate, regulatory changes, and customer demands for new services are driving the need to merge. These challenges require efficient coordinated response by the clearing and execution venues, and the firms have concluded that vertical integration will facilitate this coordination. This echoes an argument that I made in my working paper on clearing silos. I also made this argument in my presentation at the CME InformationXchange in Boca Raton in March. Charley Carey of the CBOT (whom I sat next to) asked if he could, er, “borrow” this argument when defending the integration of clearing and execution in a merged CME-CBT. (This was the day before the ICE bombshell.)
It is interesting that the Swiss have moved towards the silo model at the same time that integration of clearing and execution is under assault elsewhere in Europe and in the US. It provides a clear illustration that there are strong efficiency arguments in favor of integration. Hopefully this will induce some reflection among those who only see (or purport to see) insidious anticompetitive motivations for integration. But somehow I doubt it.
Along these lines, I just read Doug Whinston’s Lectures on Antitrust Economics. Whinston’s book provides a very readable overview of the potential anticompetitive effects of tying and other vertical restraints. Even Whinston admits that these arguments are merely statements of “possibilities” that would contradict the Chicago School view that such restraints seldom have anticompetitive motivations. As such, it is very difficult to think of practical examples of these models of “possibilities.” It is also abundantly clear that these models have no bearing on the tying of clearing and execution. The only model that is even remotely relevant is that of Carlton and Waldman, and my aforementioned working paper shows that an adaptation of this model to the exchange context does not support the view that integration and tying are anticompetitive. Instead, formalizing and extending ideas first propounded on SWP, the paper concludes that integration can enhance efficiency in numerous ways–and the Swiss announcement provides a timely and powerful endorsement of that conclusion.
