Better Markets and the Open Markets Institute jointly signed a letter to federal antitrust and financial regulators raising serious concerns about the CME Group’s near-monopoly in derivatives markets and the recently reported potential merger between the CME and Cboe Global Markets. By some measures the CME already facilitates 92 percent of U.S. exchange-traded derivatives volumes, and further consolidation would increase the CME’s already dominant position.
With remarkable specificity, the Financial Times reported on a proposed merger between CME and one of its few meaningful competitors, Cboe. Although CME denies any merger plans, if the reports are correct, an investigation of the possible combination and its potential adverse competitive effects would be a public-interest imperative.
The joint letter asks the head of the Justice Department Antitrust Division, Acting Assistant Attorney General Richard Powers; Federal Trade Commission Chair Lina Khan; Securities and Exchange Commission Chair Gary Gensler; and Acting Chair Rostin Behnam of the Commodities Futures Trading Commission to assess the potential anti-competitive burdens that might be associated with such a merger. Better Markets and the Open Markets Institute also request that the agencies examine the existing concentration at derivatives exchanges and the adverse impact of fifteen years of consolidation.
Why it matters: The potential harm of such a merger to the public, investors, businesses, and innovators would be substantial. Consolidation in these financial markets harms the public by concentrating risk, market-making services, trading data, and control in ways that increase volatility and the likelihood of disruptions. Additional consolidation would also harm investors by reducing choice and increasing price volatility. Specifically, it could hamper mechanisms for price discovery by consolidating control of volatility products at a single entity, and it may lead to the manipulation of the volatility index and related contracts. In addition, the added concentration could make it easier for large corporations and speculators to attempt to manipulate and increase the prices for the services, goods, and commodities traded on these markets. In the end, consumers would suffer.
What we said: In our joint letter, we trace the history of consolidation in the derivatives markets over the last 15 years, leading to the already dominant position that the CME has in trade execution, clearing, and data reporting in derivatives. By some measures, the CME already facilitates 92 percent of U.S. exchange-traded derivatives volumes. We also highlight the adverse impact that further consolidation through the possible merger between CME and Cboe could have. Farmers, consumers, businesses, and investors all rely on well-functioning commodity markets to hedge risk and reliably price commodities. Lack of competition ultimately threatens to undermine these critical functions, to the detriment of businesses and consumers alike. Finally, we ask that the agencies not only assess the harms threatened by this specific potential merger but also conduct a data-based study of the existing concentration at the derivatives exchanges and the impact this trend has had.
Bottom Line: The potential merger between CME and Cboe threatens yet more concentration of power and less competition in the derivatives markets. That in turn means a higher risk of major market disruptions, greater likelihood of market manipulation, and ultimately, potential price increases for a wide range of consumer goods, from groceries to gas at the pump.