Guess what: It's the settlements! Vertical integration as a barrier to efficient exchange consolidation

Exchanges and other trading platforms are often vertically integrated to carry out trading and settlement as one operation. We show that these vertical silos can prevent the full realization of efficiency gains from horizontal consolidation of trading and settlement platforms. When costs of settlement are private information, a merger of vertical silos cannot be designed to always ensure efficient trading and settlement after the merger. We also show, however, that efficiency can be guaranteed either by merging the trading platforms and delegating the operation of settlement platforms to independent agents or by forcing competition across vertical silos through cross-listings.