Over the past few weeks, we have shown data on the growth of dark trading and increased fragmentation of lighting exchanges. Today, there are 16 stock exchanges, over 30 ATS venues, and over 100 brokers in the US. They are all competing to provide trading services.
It sounds like a lot of fragmentation in the market. It can bring more costs than profits for investors at some point.
Today we use the same tests that the US Department of Justice (DOJ) uses for mergers. The test has already been made in the US stock market. Very Competitiveness.
DOJ uses HHI as a measure of competition
DOJ uses the Herfindahl-Hirschman Index (HHI) when considering the antitrust impact of mergers and acquisitions. HHI is based on the work of economists Albert Hirschmann and Oris Herfindahl, and uses the market share of every company in the industry to measure focus.
Simply put, HHI indexes are created using the weights of each company in the industry. To do this:
- Each company’s market share is squared (which means larger companies count even more).
- All scores are then summed.
Here are some examples of how HHI mathematics works in Chart 1 below. The more concentrated “Industry A” will win 3,400, while the more competitive “Industry C” will win 900.
Chart 1: Changes in competitiveness based on the number of companies and their market share
In DOJ’s view, HHI score Over 1800 are not competitive. The 1000 to 1800 are reasonably competitive, but industries below 1000 are very competitive.
But to be fair to the DOJ, they actually use it Two scenarios When testing a merger. As they are concerned whether the merger will “reduce competition significantly” or “they tend to create monopolies,” the division will look at whether the market share of the merged company exceeds 30%, and in that case the merger will increase HHI by more than 100 points.
HHI says US trading is a highly competitive industry
You can also apply HHI mathematics to the US stock market.
The colours in the chart below show all of the various participants in recent years.
Next, we make some conservative assumptions.
- Add all exchanges from the same group together.
- Use generous value for “other brokers” that are aggregated in FINRA data.
Based on that, the industry has an HHI score of 874 in the fourth quarter (chart below, black line). We also used recent company-level data to calculate the HHI for Q4, which was historically unavailable and scored 900. So, both methods will not only make the US stock market highly fragmented, but also sophisticated. Competitiveness.
In fact, for the past two years, HHI has existed at a very competitive range or threshold. Furthermore, there are no exchange groups with a market share of nearly 30% (bar). Therefore, the US stock market also looks like the “Industry C” mentioned above.
Chart 2: The stock market is extremely competitive and has become more competitive over time
The US market is becoming even more competitive
Three new exchanges have been established since 2020, with five more exchanges set to launch operations this year or early next year, along with four more ATSs. This will make the total number of venues well above 50.
In fact, US market economics actually supports newer venues than existing venues. Therefore, it is not surprising that the HHI score is falling (chart above, black lines). The industry’s HHI score was around 1350 at the beginning of 2019, estimated to be in the middle of a moderately competitive zone. Now we are on track to a very competitive zone and heading down.
In short, the US market is in business more Competitiveness.
The balance between competition and fragmentation
Therefore, regulators may question whether the market for trading services is competitive, but hard data does not only make it competitive, but Very Competitiveness.
However, at some point, questions to regulators are a way to balance competition and fragmentation. Fragmentation adds fixed costs for hardware, broker connections, exchange programmers, and management. For investors, opportunities and search costs are high. And not all venues are interested in the capital formation of the latest growth company.
That’s important when you consider that the SEC mission involves maintaining “.Efficient The market too.”
