But the same big question could be asked: So what? Why is it regulators’ business to make sure we all have cheap trading costs?
Again, I realize that the gang around the bar might think this one is obvious, too, since trading costs have come down dramatically, and the structure that brought about the reduction created HFT and all the electronic exchanges that we see today. Those who survived the change are in business because of the reforms. So why wouldn’t they applaud them?
Yet problems arise when antitrust regulators are put in charge of holding down costs. First, consider the distortions that come about when trustbusters are able to succeed in some cases and not in others. Let’s say, for example, that we get cheap trading costs but not cheap beer, or vice versa. This would cause us to over-consume or under-consume beer or trading services relative to the other, sending poor signals to the producers of these goods as to what we really want or need. Where’s the efficiency in that?
Second, forcing producers to receive less so consumers can pay less may have consequences in terms of the quality of the product or its methods of delivery, either of which could rile consumers. Cutting corners in beer -- like reducing alcohol content, as Maker’s Mark did recently to the chagrin of its fans, or reducing the number of brands or their distribution to your favorite bars -- could seriously annoy some drinkers. More consequentially, messing with the structure of equity trading to lower costs could harm the market’s ability to deliver capital to companies, or a reliably stable trading environment, or an understandable trading process that makes investors feel comfortable investing.
Third, lowering prices across all the industries that are vulnerable to antitrust attack could have unexpected disinflationary or deflationary effects, which are beyond the remit of the antitrust agencies individually, or the antitrust process in general. While this problem may seem small, since it would be expected to proceed gradually as industries are attacked sequentially (although the Wall Street Journal says the DOJ now is simultaneously attacking seven industries in “Antitrust, Coming to a Court Near You”), the much-lamented lack of pricing power across many industries today is certainly a complicating factor in the mission of the Federal Reserve to enable growth without inflation.
The commoditization of every aspect of the financial industry is a case in point. From exchanges to brokers to investment banking, research and the decline in the number of public companies, there has been a significant decline in Wall Street as an industry as its pricing power disappears. That decline has been accompanied by a decline in jobs for Main Street as the doldrums in new-company creation continue. More troubling, the Wall Street product today has fewer fans than it did before its pricing power was removed.
Diehard market structure types may imagine that market structure has nothing to do with capital formation, as they each tout their favorite fixes for current problems. But the fixes the experts have touted since the National Market System was launched in 1975 were for the same problems they are still trying to fix today, namely, the lack of fairness, access, transparency, best price, etc. The only difference is that the problems have speeded up and the fat tails have become obese, a result that appears to have been caused by, and certainly happened alongside of, the previous fixes.
[Related: “Narrower Spreads: A Trivial Pursuit”]
It may be instructive to contemplate that this same market structure process is now going after beer. If the trustbusters are as successful at destroying the pricing power and organization of the beer market as they have been at destroying the pricing power and organization of capital markets, then we’d all better drink up now.
Steve Wunsch is a writer and consultant on stock market structure living in New York City. He was the founder of the Arizona Stock Exchange launched in 1992 and an inventor of the ISE Stock Exchange launched in 2006. His latest book, Nature’s God, discusses the inappropriateness of antitrust as a market design tool.