TURMOIL, TRANSPARENCY, AND TEA: EVALUATING THE IMPACT OF IT ON LONDON'S STOCK EXCHANGE

Abstract

Evaluating strategic investments in information technology can be difficult. Uncertainties exist in customer responses, competitor reactions, and thus in the actual economic benefits to be realized. Valuing interorganizational information systems (IOS) is far more complex, since the valuation is complicated by issues of bargaining power, and distribution of IOS benefits. Although an IOS may create a net benefit or economic surplus, valuation by the innovator contemplating the investment must also consider who retains these benefits. The distribution is in part determined by the technology's capabilities, but principally by the power and resource endowments of the different IOS participants. Screen-based securities markets represent IOSs that serve many stakeholders including investors, securities firms, and listed companies, as well as the securities exchange or vendor providing the system. The London Stock Exchange's (LSE) £25 million investment in trading technology at the time of its 1986 Big Bang deregulation did not benefit all IOS participants equally. Although the screen-based market produced significant benefits for the Exchange, and for investors, whose transactions costs were reduced, any gains retained by the LSE's member firms, who ultimately paid for the investment, are difficult to demonstrate. The damage done to those parties that paid for technological improvements at the LSE has led to dysfunctional behavior by the member firms, and to some deterioration in the quality of the market. The evidence indicates that an uneven distribution of benefits can potentially subvert the efficient functioning of an important IOS.