Financial Exchange Consolidation and Antitrust : Is There a Need for More Intervention?

Financial exchanges are the heart of the modern economy. As they have evolved from small nonprofit venues to large multinational corporations, their profit incentives have encouraged a vibrant mergers and acquisitions environment, allowing exchanges to pursue greater network effects and economies of scale. The national stock exchanges have absorbed the regional exchanges, and the three primary futures exchanges have combined into one of the world's largest exchange groups. The Antitrust Division of the Department of Justice has remained largely silent during this wave of consolidation, publicly analyzing only a handful of more than a dozen deals and moving to block only one exchange merger in the last decade. Some have questioned whether the agency is doing enough; others argue it is doing too much. On most levels, a light touch arguably has been appropriate for this sector because exchanges exhibit a unique blend of network effects, scale and scope economies, disruptive technologies, and complex regulatory environments. In addition, financial exchanges have a long history of self-regulation. This self-regulatory philosophy, as well as the broad, non-competition investor protection mandates of the Securities and Exchange Commission and Commodity Futures Trading Commission, the platform economics of exchanges, and the increasing reliance on technology, together have yielded a unique competitive terrain in the exchange industry. As a consequence, the DOJ has had less latitude to act here because competition concerns often are subordinated to non-competition goals and market concentration and self-regulation pose certain specific benefits sought by regulators. But recent incidents like the May 2010 flash crash, the problematic Facebook initial public offering, and other technical issues have raised questions about possible structural flaws in the existing competitive and regulatory landscape. These incidents also implicate the proper role for the DOJ in enforcing and advocating for vigorous competition in these markets