New Trading Technology in U.S. Options Exchanges: Network Effects and Broker-Specific Effects in E-Market Growth

Diffusions of new information technologies such as web browsers and electronic markets are highly sensitive to feedback.  Economic forces such as adoption decisions and network effects can determine the impact of technology as much as technical progress (Griliches, 1957; Hall, 2003; and Bresnahan & Yin, 2005).  Two innovative, all-electronic options exchanges, the International Securities Exchange (ISE) and the Boston Options Exchange (BOX), opened for trading in 2000 and 2004.  These new options trading platforms have gained trading volumes in competition with four incumbent markets in the U.S. including the 33-year old Chicago Board Options Exchange (CBOE).  Compared with floor exchanges, electronic options markets offer technical advances such as immediate trading, direct user access to the market, and reduced costs.  Based on a sample of 350 quarterly disclosures from 20 major brokerage firms, OLS, Tobit, and fixed-effects models are estimated to explain individual firms’ adoption levels and the drivers of new markets' growth.  Significant factors are whether a firm is an online broker, whether it has an e-exchange membership or ownership role, and the network externality effect of the markets’ growth.  Firm-specific factors are shown to account for about 60 percent of adoption explained by the model, with the remaining 40 percent accounted for by the network effects of growing market liquidity.  There is also evidence of second-mover disadvantage and successful competitive responses from the four incumbent exchanges.

Biography:

Bruce W. Weber is Professor of Information Management and Subject Area Chair of Management Science & Operations at the London Business School, where he teaches “Information Management”, “Financial Information Systems”, and “Trading and Financial Market Structure” in MBA, masters, and executive programs.  He has an A.B. in Mathematics from Harvard University, and a Ph.D. in Decision Sciences from the Wharton School of the University of Pennsylvania.  His research on strategic IT and the computerization of financial services has been published in a number of academic journals. Prior to joining the London Business School in 2003, he was on the faculty of the Stern School of Business, New York University, and Baruch College of the City University of New York, where he was founding director of the Wasserman Trading Floor, a 60-workstation financial market education center with analytic software and real-time market price feeds.  He is co-developer of the market simulation, TraderEx (http://www.etraderex.com/), and his book, “The Equity Trader Course” (Wiley, 2006) was written with Robert A. Schwartz and Reto Francioni, the CEO of Deutsche Börse. He consults on IT and market policy issues for several major financial services firms and exchanges, and has presented executive training programs in decision analysis and technology strategy to U.S. and European firms.

Contact information:

Naima Zerhane

Email