If changing the model of consolidators undermines the ability of SROs to adequately fund their self-regulatory functions, this damages a key piece of the regulatory mechanism. The committee still needs to address these issues directly. In addition, for effective regulation there need to be clear and transparent minimum standards that the regulators, the courts, the SROs and other market participants can observe and enforce. Less regulation may seem appealing, but it has potentially dangerous economic consequences in terms of both market power and quality. Market Power 1.
Market power arises in any situation where there is price setting rather than price taking.
In a market with differentiated goods or imperfect substitutes there is always some degree of market power. The question is to what extent the price setter feels constrained by potential competition, the response of consumers, and regulators. Much of our discussion has focussed on actual competition, i.e., the alternative providers to whom consumers can turn if they are not satisfied with a product or service. The intensity of competition in US securities markets is an important outcome of the current regulatory system, but there is no guarantee it would survive the transition to multiple consolidators without the Display Rule. In general it is costly for consumers to search between segments at one moment or even over time.