FTC Comment Before the Commodity Futures Trading Commission Regarding the Application of U.S. Futures Exchange, LLC for Contract Market Designation

1 Federal Trade Commission Act, 15 U.S.C. § 45.
2 Lists of recent FTC advocacy filings and economic reports are available at <http://www.ftc.gov/be/advofile.htm>
and <http://www.ftc.gov/be/econrpt.htm>.
3 See FTC Staff, Comment to the CFTC on Proposed Regulation 155.5 (July 20, 1990).
4 See Council of Economic Advisers, Economic Report of the President, Ch. 3, at 99 (2002) (“[C]ompetition keeps
prices low. Competition in its various forms discourages any one firm from raising prices above what others would
charge for similar goods or services. Second, competition ensures that only those firms that can meet consumer
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Office of the Secretary
January 12, 2004
Ms. Jean A. Webb
Secretary to the Commission
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, N.W.
Washington, D.C. 20581
Re: U.S. Futures Exchange, L.L.C.
Dear Ms. Webb:
The Federal Trade Commission is pleased to respond to your request for public
comments regarding the application of U.S. Futures Exchange, L.L.C. (“USFE”) for contract
market designation. USFE, a foreign-owned firm, seeks to establish a U.S.-registered futures
exchange on which contracts involving U.S. Treasury securities could be traded. This letter will
discuss the application’s potential impact on consumers of futures trading services, but will not
address the regulatory issues relating to the application.
The FTC is charged by statute with preventing unfair methods of competition and unfair
or deceptive acts or practices in or affecting commerce.1 Under this statutory mandate,
Commission staff often have assessed the competitive impact of regulations and business
practices that impede competition or increase costs without offering countervailing benefits to
consumers. 2 In the past, Commission staff have also submitted comments to the CFTC
analyzing trading markets. 3
Economic theory indicates that consumers would likely benefit from having additional
competition in the market for futures trading services. Competition is the best mechanism for
achieving the optimal mix of products and services in terms of price, quality, and consumer
choice.4 Competition from new entrants can encourage producers to become more efficient and

Federal Trade Commission Comment to the Commodity Futures Trading Commission -- Page 2
demands at the lowest possible costs will remain viable. Finally, competition encourages innovation in products and
services, as well as in production and distribution methods, among other things.”).
5 Department of Justice and Federal Trade Commission, 1992 Horizontal Merger Guidelines § 3.0, at
<http://www.ftc.gov/bc/docs/horizmer.htm> (discussing the ability of new entry to ameliorate concerns about
mergers that may otherwise enhance or create market power ); Council of Economic Advisers, Economic Report of
the President, Ch. 4, at 137 (2003) (“Regulatory reform in the airline, railroad, and trucking industries and the lifting
of geographical restrictions on bank expansion are all cases [where] . . . [t]he resulting increase in competition . . .
has caused prices to fall, innovation to increase, and resources to be more efficiently allocated.”).
6 See Council of Economic Advisers, Economic Report of the President, Ch. 6, at 235 (2003) (“[I]f foreign firms are
able to freely move financial assets and profits into and out of a country, and if tariffs are low on imported inputs,
they will be more inclined to set up plants in that country, thus contributing to its growth. A lack of burdensome
regulation can also encourage foreign investors to make the commitment to establishing a long-term presence in a
country. . . . Besides bringing in valuable capital, [foreign direct investment] also spurs growth through the
management skills, know-how, and new technologies that foreign investors bring into the host country. These
advantages have been shown, in both developed and developing countries, generally to result in higher productivity
in foreign establishments than in domestic firms . . .”); Letter from Alan Greenspan, Chairman, Board of Governors
of the Federal Reserve System, to Rep. Jerry Moran, House of Representatives (Nov. 5, 2003) (“In many segments
of our economy and financial markets, competition has been enhanced by the establishment of a direct presence in
the United States by a large number of non-U.S. firms.”).
7 See Timothy J. Muris, FTC Chairman, State Intervention / State Action – A U.S. Perspective, speech before the
Fordham Annual Conference on Int’l Law & Policy (Oct. 24, 2003), at
<http://www.ftc.gov/speeches/muris/fordham031024.pdf>. In addition, long experience has taught antitrust
enforcers that competitive markets are more likely than specific rules governing conduct to protect consumers and to
result in efficient pricing, output, and investment.
8 Congressional Statement of Purposes for Commodity Futures Modernization Act of 2000, Pub. L. No. 106-554,
114 Stat. 2763 (Dec. 21, 2000).
9 Id.
responsive to the marketplace.5 Competitive pressure from non-U.S. firms can have the same
positive effect on consumer welfare.6
Moreover, public restraints on new entry can harm consumer welfare by stifling
innovation and allowing existing firms to charge higher prices.7 Through legislation, the
Congress has indicated its interest in the efficient operation of the market for futures trading
services. 	In enacting the Commodity Futures Modernization Act of 2000, Congress sought,
among other goals, “to promote innovation for futures and derivatives.” 8 Congress also sought
“to streamline and eliminate unnecessary regulation for the commodity futures exchanges and
other entities regulated under the Commodity Exchange Act.”9
Economic studies also indicate that consumers would likely benefit from having
additional competition in the market for futures trading services. For example, two recent
studies found that securities-based options listed on multiple exchanges, rather than a single

Federal Trade Commission Comment to the Commodity Futures Trading Commission -- Page 3
10 See Patrick de Fontnouvelle, Raymond P.H. Fishe, and Jeffrey H. Harris, “The Behavior of Bid-Ask Spreads and
Volume in Options Markets During the Competition for Listings in 1999,” forthcoming in J. FINANCE; Stewart
Mayhew, “Competition, Market Structure, and Bid-Ask Spreads in Stock Option Markets,” 57 J. FINANCE 931 (Apr.
2002).
11 See Beatrice Boehmer and Ekkehart Boehmer, “Trading Your Neighbor’s ETFs: Competition or Fragmentation?”
European Finance Association 2002 Berlin Meetings Discussion Paper (2002).
12 See Ian Domowitz, “Liquidity, Transaction Costs, and Reintermediation in Electronic Markets,” 22 J. FIN.
SERVICES R ESEARCH 141 (Aug./Oct. 2002); Jennifer S. Conrad, Sunil Wahal, and Kevin Johnson, “Institutional
Trading Costs and Alternative Trading Systems,” 70 J. FIN. ECON. 99 (Oct. 2003).
13 Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993). See also Atlantic
Richfield Co. v. USA Petroleum Co., 495 U.S. 328 (1990); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475
U.S. 574 (1986).
14 Matsushita Elec., 475 U.S. at 589.
exchange, have significantly lower bid-ask spreads.10 In particular, the studies found that
competition among exchanges decreases the bid-ask spreads by approximately 30 to 40 percent.
This evidence of exchange-based competitive effects parallels evidence of the procompetitive
effects of multiple exchanges in equity markets. For example, one study found double-digit
percentage declines in bid-ask spreads when the NYSE entered into the trading of securities that
were previously traded on the AMEX, the Nasdaq InterMarket, and several other regional
exchanges.11 The studies found that the competitive benefits of multiple exchanges were
permanent for trading in both options and securities. Because the institutional features of futures
trading differ from those of securities and securities-based options, the entry of a new futures
exchange may affect competition somewhat differently, but nevertheless the entry of a new
exchange would increase competitive pressure. This, in turn, would likely improve consumer
welfare. Moreover, no studies suggest that competition will not have positive effects in the
market for futures trading services.
In addition to providing greater inter-exchange competition, a new exchange may also
offer a competing business model. Examples include all-electronic trading systems and out-
sourcing of many functions that other exchanges perform internally. 	Some economic studies
have found that electronic trading systems lower the cost of executing trades.12 Thus, the
business model may provide a second mechanism through which consumers may benefit.
Vigorous competition allows consumers to reap the benefits of lower prices and higher
quality. Some commentators, however, have raised a concern that a new entrant could attempt to
gain market share through predatory pricing behavior that takes the form of incentive and rebate
programs. As a general rule, successful predatory pricing, i.e., below-cost pricing intended to
induce the exit of a rival, is very unlikely to occur. In several important antitrust decisions, the
Supreme Court has been absolutely clear that, as a general matter, low prices are “a boon to
consumers.” 13 To be unlawful, below-cost pricing must injure or threaten to injure consumers,
and consumers are injured by below-cost pricing only if sustained above-cost prices occur later.14
Thus, even if a below-cost pricing strategy succeeds in temporarily reducing the number of
competitors, the price-cutter must keep competitors from returning after it tries to raise prices

Federal Trade Commission Comment to the Commodity Futures Trading Commission -- Page 4
15 Brooke Group, 509 U.S. at 224.
16 Id. at 224, 226.
17 Frank H. Easterbrook, Predatory Strategies and Counterstrategies, 48 U. C HI. L. R EV. 263, 313-14 (1981)
(citations omitted).
18 D ENNIS W. C ARLTON AND J EFFREY M. PERLOFF, M ODERN INDUSTRIAL O RGANIZATION 342 (3d ed. 2000).
19 See J EFFREY C HURCH AND R OGER W ARE, INDUSTRIAL O RGANIZATION: A STRATEGIC A PPROACH 659 (2000).
20 P. A REEDA AND H. H OVENKAMP , A NTITRUST LAW ¶ 723a (2d ed. 2002) (“as the Supreme Court has observed,
although competitors allege predation frequently, it is probably quite uncommon”).
again.15 Otherwise, the below-cost pricing strategy, which requires that the firm incur losses on
every sale, will not succeed. When a firm fails to recoup short-run losses in the long run,
consumers enjoy a windfall: “[U]nsuccessful predation is in general a boon to consumers . . .
That below-cost pricing may impose painful losses on its target is of no moment to the antitrust
laws if competition is not injured.” 16
In recent years, many scholars have studied anticompetitive below-cost pricing. In an
exhaustive discussion, Frank Easterbrook, now sitting on the U.S. Court of Appeals for the
Seventh Circuit, noted that “[s]tudies of many industries find little evidence of profitable
predatory practices in the United States or abroad. These studies are consistent with the result of
litigation; courts routinely find that there has been no predation.” 17 Other analyses largely agree.
A leading textbook on industrial organization economics notes that “[g]iven all the problems in
identifying predatory pricing, it is not surprising that economists and lawyers have found few
instances of successful price predation in which rivals are driven out of business and prices then
rise. Although predation is frequently alleged in lawsuits, careful examination of these cases
indicates that predation in the sense of pricing below cost usually did not occur.” 18 Predation
sometimes occurs,19 but not nearly as frequently as claimed. 20
The Supreme Court has endorsed this scholarship. Because it is difficult to profit from
anticompetitive below-cost pricing, the Supreme Court has observed that “there is a consensus
among commentators that predatory pricing schemes are rarely tried, and even more rarely

Federal Trade Commission Comment to the Commodity Futures Trading Commission -- Page 5
21 Matsushita Elec., 475 U.S. at 589.
22 Id. at 594.
successful.” 21 Therefore, the Court has emphasized the need to take great care to distinguish
between procompetitive price cutting and anticompetitive predation because “cutting prices in
order to increase business often is the very essence of competition . . . .” 22
For these reasons, the Federal Trade Commission believes that consumers would benefit
from additional competition in the market for futures trading services.
By direction of the Commission.
Donald S. Clark
Secretary