On the sources of private information in FX markets

We investigate the source of information advantage in inter-dealer FX trading using data on trades and counter-party identities. In liquid dollar exchange rates, information is concentrated among dealers that trade most frequently and specialize their activity in a particular rate. In cross-rates, traders that engage in triangular arbitrage are best informed. Better-informed traders are also located on larger trading floors. In cross-rates, the ability to forecast flows explains all of the advantage of the triangular arbitrageurs. In liquid dollar rates, specialist traders can forecast both order-flow and the component of exchange rate changes that is uncorrelated with flow.     

Financing rapid transit—a simulation of cost sharing for extensions to BART

The initial Bay Area Rapid Transit (BART) system was financed largely by bond issues and direct sales tax revenue from the three counties in the San Francisco Bay Area, which the mass transit system now serves. It appears that if further extensions of the BART system into other jurisdictions are to be undertaken, they will be funded largely with federal government subsidies. Hence, only a small portion of the capital costs of any extension will be borne by the residents of that jurisdiction and, therefore, a significant property tax burden inequity will exist between those residents served by the original system and those residents to be served by an extension. If extension of the system into neighboring jurisdictions is undertaken, it is likely that a “sharing rule” or “buy-in rule” will be politically negotiated to equalize this burden.Unfortunately, new jurisdictions to be served by BART cannot evaluate a BART extension, as against other mass transit alternatives, since its total capital cost will involve not only the incremental land acquisition and construction costs, but an unknown cost share amount. This paper reports on the development of a decision support system (DSS) incorporating a simulation-based financial planning model, to assess the impact of various levels of federal support and alternative BART extensions upon the financial resources of the participating jurisdictions, present and potential.The utility of the DSS for planning is illustrated by examining a prominent alternative, the extension of BART to the San Francisco Airport and San Mateo County, under the assumption that the sharing rule will be based upon total assessed property valuation. Aside from its utility as a planning tool, the usefulness of the DSS in this task is further demonstrated by its identification of unforeseen tax burden inequities, which would result from one proposed sharing rule.     

Predators and prey: a new ecology of competition

Much has been written about networks, strategic alliances, and virtual organizations. Yet these currently popular frameworks provide little systematic assistance when it comes to out-innovating the competition. That's because most managers still view the problem in the old way: companies go head-to-head in an industry, battling for market share. James Moore sets up a new metaphor for competition drawn from the study of biology and social systems. He suggests that a company be viewed not as a member of a single industry but as a part of a business ecosystem that crosses a variety of industries. In a business ecosystem, companies "co-evolve" around a new innovation, working cooperatively and competitively to support new products and satisfy customer needs. Apple Computer, for example, leads an ecosystem that covers personal computers, consumer electronics, information, and communications. In any larger business environment, several ecosystems may vie for survival and dominance, such as the IBM and Apple ecosystems in personal computers or Wal-Mart and K mart in discount retailing. In fact, it's largely competition among business ecosystems, not individual companies, that's fueling today's industrial transformation. Managers can't afford to ignore the birth of new ecosystems or the competition among those that already exist. Whether that means investing in the right new technology, signing on suppliers to expand a growing business, developing crucial elements of value to maintain leadership, or incorporating new innovations to fend off obsolescence, executives must understand the evolutionary stages all business ecosystems go through and, more important, how to direct those changes.     

The Safeguard Clause, Asymmetric Information, and Endogenous Protection

When imports surge, governments often must seek simultaneously to satisfy protectionist pressures through increased tariffs, induce adjustment to foreign competition, and minimize consumer costs of protection. The WTO's safeguard clause can be viewed as an attempt to resolve these potentially conflicting goals since it allows governments to offer an implicit contract to protected industries to induce adjustment. In this paper, we show that with asymmetric information about costs, protected industries behave strategically which leads to under-adjustment. The safeguard clause therefore cannot optimally resolve the conflict among domestic political objectives.     

Price Discovery in the Treasury‐Bill When‐Issued Market

When‐issued (i.e., forward) trading in T‐bills yet to be auctioned provides a unique environment for examining price discovery. Because T‐bills are auctioned in a sealed‐bid process, when‐issued traders cannot observe the spot market price. Yet the forward price must ultimately converge on the auction outcome price. Our results indicate that traders in the when‐issued market “discover” the ultimate auction price. Little evidence is found that standard order flow variables contribute to price discovery. Instead, the ability to observe a few trades with relatively small volume in the when‐issued market is sufficient to discover the auction price resulting from the sealed‐bid process.     

Concept testing

This paper is a review of concept testing based on the published literature and a series of personal interviews with leading practitioners. While there is considerable agreement on the usefulness of concept testing, practitioners disagree on the best way to perform them. In addition to highlighting these disagreements, the paper covers general suggestions for improving concept testing.     

The governance of exchanges: members' cooperatives versus outside ownership

Many securities exchanges are run as members' cooperatives:they are run on behalf of the people who use the exchange. Thisform of governance is unusual. Most businesses have outsideownership: the people who own and run the firm are typicallynot the same people who buy and use the firm's product. Thatis, contrast to a members' cooperative, ownership is not bundledwith the right to consume. We argue that the crucial distinctionbetween a cooperative structure and outside ownership concernswho has residual rights or control over the non-human assets.With outside ownership, control rests with the owners; and sinceoutside owners are typically only interested in maximizing profit,they tend to make inefficient decisions, tailored to the marginaluser. By contrast, in a cooperative the members have collectivecontrol. Collective decision making is typically inefficient,because in a vote the views of the pivotal voter are not necessarilythe same as those of the membership as a whole. Thus both formsof governance, outside ownership and a members' cooperativeare inefficient - but for different reasons, and in differentways. In comparing the two ownership structures, we find thatoutside ownership becomes relatively more efficient than a members'cooperative as: (i) the variation across the membership becomesmore skewed; and (ii) the exchange faces more competition. Formany exchanges, but these changes have occurred in recent years.However, even if outside ownership is now the superior structureof governance for an exchange, a members' cooperative may not,of its volition, vote in favour of making the change; i.e. theymay decide not to sell up. This is because the gainers may beunable to compensate the losers.