Equity Markets Are Highly Competitive

In the past few weeks, we have shown data on the growth of dark trading and the increasing fragmentation of lit exchanges. Today, there are 16 equity exchanges, over 30 ATS venues, and more than a hundred brokers in the U.S. — and they’re all competing to provide trading services.That sounds like a lot of fragmentation in the market, which at some point might result in more costs than benefits to investors.Today, we’re going to use the same test the U.S. Department of Justice (DOJ) uses for mergers. That test shows that the U.S. stock market is, already, highly competitive.The DOJ uses HHI as a measure of competitionThe DOJ uses the Herfindahl-Hirschman Index (HHI) when considering the antitrust implications of mergers and acquisitions. The HHI, based on the work of economists Albert Hirschman and Orris Herfindahl, uses the market share of all the firms in an industry to measure how concentrated it is.In simple terms, the HHI index is created using the weights of each company in an ind...