Nested markets

In the new Foreign Affairs, Felix Salmon reviews Darkness by Design: The Hidden Power in Global Capital Markets, by political scientist Walter Mattli. Salmon and Mattli share the view that more competition among stock exchanges has been bad for financial markets. Here’s Salmon:

Up until that point, the exchange was a mutual society: firms could buy seats, and the exchange was owned by its members. After 2005, it demutualized, stopped selling seats, and became just one among many exchanges, most of which were owned and operated by enormous global broker-dealers–think Credit Suisse, Goldman Sachs, and Merrill Lynch–that had spent limitless hours and dollars on lobbying the SEC to push Reg NMS through. Rather than being a utility owned by its members, the NYSE was now a profit-maximizing entity like all the other exchanges.

There’s a parallel here to today’s tech platforms. They’re big and powerful, and some argue that they should be broken up. But would more (but smaller) platforms be a good thing? Would competition help?

Salmon and Mattlie argue that having a marketplace (the stock market) competing in a market of its own (the market for trades) has lots of downsides. Whatever you think of that in the context of stock exchanges, it’s worth considering for tech. Would competition between mini-Facebooks shift power toward advertisers and, as a result, further erode privacy? What might the mini-Facebooks do in order to win the business of key publishers or to gain access to particular markets?

Of course, none of the tech platforms are currently run as mutual societies. And so the conversation tends to be about either breaking them up to encourage competition, or regulating them as utilities.

But, just for the fun of it, imagine what a mutual society model might look like. What if Twitter were run for the benefit of its users, with major publishers “buying seats” and individual users electing representatives to advance their interests? You can imagine all sorts of reasons that might not work. (A version of this has been proposed.) But as Salmon and Mattlie suggest, counting on competition between platforms isn’t always a good thing either.

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