(In)efficient investment in financial market infrastructure: the role of governance structures

This paper establishes a link between investment in financial market infrastructure and its governance structure as either a user-oriented or a for-profit organization. The infrastructure is used to ensure that capital can be allocated through financial trades. It is shown that only a user-oriented infrastructure that allocates costs appropriately across different user groups can achieve efficiency. If costs cannot be allocated appropriately, underinvestment occurs even if the infrastructure is user-oriented. Hence, user-orientation is a necessary, but not a sufficient, condition for efficiency. On the contrary, an infrastructure that operates for profit and that is free to set its access fees will always lead to overinvestment. Moreover, requiring free access to the infrastructure does not necessarily lead to efficiency, and overinvestment can still occur. These results should caution policy-makers and regulators in two ways. First, efficiency does not necessarily result from regulating access to a for-profit infrastructure. Second, one cannot interpret measures such as trading volume as accurate indicators of efficiency in financial market infrastructures.