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Wall Street’s Oligopoly Flexes Its Muscle

Posted by Larry Doyle on March 15, 2010 12:51 PM |

Pricing power is everything.

What businessman wouldn’t like greater control and influence over the pricing of his goods and services? How are prices determined? In a capitalist system, prices are a function of the competitive forces of supply and demand. What happens when competition dwindles? Pricing power for the suppliers increases. How does competition dwindle? When barriers to entry are so high, or competitors go out of business. This economic reality is also known as an oligopoly and it defines the current state of our financial industry known as Wall Street.

Is Wall Street taking advantage of the lessened competition and flexing its muscle to drive revenue? Is the Pope Catholic?

Bloomberg takes us into the the world of derivatives trading to shed some light on Wall Street’s newly defined oligopolistic (say that six times fast) nature. Bloomberg writes, Goldman Sachs Demands Collateral It Won’t Dish Out:

Goldman Sachs Group Inc. and JPMorgan Chase & Co., two of the biggest traders of over-the- counter derivatives, are exploiting their growing clout in that market to secure cheap funding in addition to billions in revenue from the business.

“If you’re seen as a major player and you have a product that people can’t get elsewhere, you have the negotiating power,” said Richard Lindsey, a former director of market regulation at the U.S. Securities and Exchange Commission who ran the prime brokerage unit at Bear Stearns Cos. from 1999 to 2006. “Goldman and a handful of other banks are the places where people can get over-the-counter products today.”

Do you think the crowds at Goldman and JP Morgan talk to each other to discuss their respective terms? Some may call that collusion. Others may think that is merely reality and “to the victors go the spoils.” Either way, Goldman and JP Morgan are reaping huge benefits and revenues in the process.

How would regulators level the playing field? Transparency. Force Goldman, JP Morgan and every other Wall Street institution to trade derivatives and every other product via a system known as TRACE (a trade reporting system managed by FINRA) so that investors are fully aware of pricing and terms within these markets.

Wall Street will not easily cede that turf, will curry favor with the pols and the regulators via massive lobbying dollars and campaign contributions, and the oligopoly will become further entrenched.

Don’t think for a second that Wall Street firms are not trying to flex these oligopolistic muscles in each and every sector of the market.

Do investors have any options or leverage to counter the Wall Street oligopoly? Yes. Investors can choose not to play Wall Street’s game. Take your business elsewhere. Find deals and products from other financial intermediaries.

I addressed these very realities a week ago in talking about Goldman Sachs on CNBC.


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