Few will disagree that competition through a diverse set of independent traders is good for futures markets trading. Still, this issue should be broadened to the subtle impact of general competition across firms in the economy, not just the futures markets themselves. A growing set of recent research suggests that the US is becoming less competitive and dominated by fewer big firms. See the Kansas City Jackson Hole Conference in 2018, “Changing Market Structure and Implications for Monetary Policy,” as a sample of the work.

Industry Domination

This growing industry domination may not rise to classic monopolies but is more likely oligopolies, where just a few firms control the majority of business. However, their control of pricing and market structure can be significant and will impact price discovery, firm flexibility, and hedging costs for producers and consumers.

Less competition is not good for markets with futures contracts because many diverse buyers and sellers will not determine the price of the underlying commodity. Price discovery will be driven by off-exchange behavior. Hedging will occur away from the exchange. Marketing decisions will have less flexibility. Strong vertical integration will lead to internal risk management mechanisms that reduce transparency. Some firms will be disadvantaged through the redistribution of risk at non-market prices.

Impacts on Different Industries

There are fewer firms that market and control grain exporting. There are fewer meatpackers. There are fewer oil refiners. The list can go on. In the cash markets, the farmer, cattle rancher, and coffee bean producer have limited choices for selling their product and may have limited options from where to buy their inputs like seed and fertilizer. As a result, buyers and sellers see the increased concentration, and those with less size are left at a cost disadvantage. This requires further consolidation as risks are shifted between players. While there may be less volatility from the fewer players, the information obtained through the competitive forces of futures trading is diminished. Each industry is unique, and a high-level discussion may not do justice to the structural changes faced, but increased concentration will hinder the competitive price process.

Lack of Action

The large banks will not make an issue of reduced competition. They have been at the forefront of consolidation. There is a growing concentration of clearing in futures trading, and banks have large lending books with industry market leaders. Trade groups will not advocate for more competition because large firms either dominate them or do not have significant market power. Consumers are fragmented groups that do not appreciate concentration issues when seeing many brands in their grocery stores. Market regulators are not concerned with broad consolidation issues as long as there is no market manipulation or extreme positions. Exchanges have consolidated, so there is little choice for trading marketplaces. More work should be conducted on the impact of market concentration and industrial organization to determine whether market concentration has gone too far.