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Capitol Report: SEC chief warns of growing monopoly power among market makers, retail brokers at GameStop hearing

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Securities and Exchange Commission Chairman Gary Gensler on Thursday warned lawmakers that growing concentration in the securities wholesaling and brokerage industries could lead to market “fragility,” and increased costs for retail and institution investors.

“At the heart of well-functioning markets and the mission of the SEC of fair orderly and efficient markets is promoting competition in markets,” Gensler said during a hearing before the House Financial Services Committee. “It can be done through transparency, but it’s also looking at our rule set to make sure that our rule set inspires more competition rather than concentration.”

Gensler noted that “our modern 2020s economy tends toward [concentration]” because of the power of “network effects” that cause the value of a service to increase for a user based on the number of other users of that service.

“We’ve seen such concentration come in other markets,” he added. “We know it’s in search, where we all go online and there’s really one dominant search engine and we know it’s true in retail products online.”

The SEC chairman said he has directed his staff to produce suggstions for ways the commission can “promote competition in the face of these network effects that are leading to concentration.”

Gensler was before the committee to discuss the events related to the short squeeze in shares of GameStop Corp.
GME,
+0.25%

in late January that drove up the price of those shares and led to several retail brokers temporarily restricting purchases in order to help manage collateral requirements mandated by their central clearinghouse.

The episode raised public awareness of the growing power of market makers like Citadel Securities that execute a growing percentage of retail trades at the expense of stock exchanges like the New York Stock Exchange or the Nasdaq
NDAQ,
-0.65%
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Citadel Securities says that it executes 47% of all retail trades in U.S.-listed equities and options.

The retail brokerage industry has seen a spate of mergers, with a merger between Charles Schwab Corp.
SCHW,
-0.51%

and TD Ameritrade closing last year, just a few years after TD Ameritrade acquired Scottrade. Morgan Stanley
MS,
+1.44%

also completed its purchase of E-Trade Financial Corp. last year, in the wake of E-Trade’s acquisition of Capital One’s brokerage business.

That consolidation, however, was in part spurred by new app-based brokerages like Robinhood and WeBull, which accelerated a shift in the industry toward a zero-commission trading model.

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