The Role of Satellite Stock Exchanges

Abstract

In many countries, capital markets are often served by multiple stock exchanges, typically with one national or dominant exchange and several regional or satellite exchanges. While multi¬ple exchanges create a competitive landscape, they also lead to fragmented liquidity and diseconomies in operations. This paper examines the role of the Lahore Stock Exchange (LSE) in comparison with the country’s dominant exchange, the Karachi Stock Exchange (KSE), in four areas: (i) market efficiency in processing information, (ii) transaction costs, (iii) contri¬bu¬tion to price dis¬covery, and (iv) market integration. A comparative analysis of the exchange performance indicates the two exchanges to be at par in terms of infor¬ma¬tional efficiency and transaction costs. There is evidence of informational linkages and interdependencies between the two exchanges; the LSE appears to contribute to price discov¬ery and competes to an appreciable extent. Against the background of proposals to merge the country’s three stock exchanges, a major consideration in evaluating public policy is the relative performance of the LSE and its viability as an effective competitor. Eliminating inter-exchange competition by merging the stock exchanges is predicted to lead to higher transaction costs, lower incentives for regulatory compli¬ance, and diminished motivation for promoting capital market development.