FTC to CFTC: Competition in Futures Trading Services Helps Consumers

The Federal Trade Commission has approved a letter to the Commodity Futures Trading Commission (CFTC) regarding the application of U.S. Futures Exchange, L.L.C. (USFE) for contract market designation. The letter addresses the likely impact of new entry on consumers, but does not address the regulatory issues relating to the application. The letter, available on the FTC’s Web site as a link to this press release, was issued in response to a CFTC request for public comment concerning the potential establishment of a U.S.-registered futures exchange by USFE, a foreign-owned firm. The letter also follows recent congressional hearings on the application.

According to the FTC’s letter, economic studies and theory indicate that consumers would likely benefit from having additional competition in the market for futures trading. Two recent studies found that securities-based options listed on multiple exchanges, rather than a single exchange, have significantly lower bid-ask spreads. This evidence of exchange-based competitive effects parallels evidence of the pro-competitive effects of multiple exchanges in equity markets. Citing legal and economic studies, and court decisions, the letter discounts the possibility that a new entrant could engage in successful predatory pricing. Luke Froeb, Director of the FTC’s Bureau of Economics, noted that, “We’ve always believed that empirical evidence should play an important role in public policy decisions. In this instance, the evidence strongly suggests that additional competition would benefit consumers.”

The letter also criticizes public restraints, such as regulatory barriers, that impede competition. The letter notes that such regulatory barriers can prevent the entry of new competitors, thereby stifling innovation and allowing firms to charge higher prices. The letter notes that in enacting the Commodity Futures Modernization Act of 2000, Congress sought “to promote innovation for futures and derivatives.”

Todd Zywicki, Director of the FTC’s Office of Policy Planning, stated that “In many industries, existing companies try to use regulatory barriers to protect their market shares. Under Chairman Muris, we’ve concentrated on trying to lower those barriers. Our job is to look out for the consumer.”

The Commission vote approving issuance of the letter was 5-0. (FTC File No. V040004; staff contact is Todd Zywicki, Director, Office of Policy Planning, 202-326-3683.)