Open Access, Interoperability, and the DTCC's Unexpected Path to Monopoly

In markets with significant scale economies and network effects, scholars and policymakers often tout open access and interoperability requirements as superior to both regulated monopoly and the break-up of dominant firms. In theory, by compelling firms to coordinate to develop common infrastructure, regulators can use these requirements to replicate scale and network economies without leaving markets vulnerable to monopoly power. Examples of successful coordination include the provision of electricity, intermodal transportation, and credit card networks. This Article analyzes the history of U.S. securities clearinghouses and depositories in order to offer a significant qualification to this received wisdom. This history demonstrates that open access and interoperability requirements can actually serve as instruments by which dominant firms obtain and entrench their monopoly power. Specifically, by imposing high fixed costs to connect to common infrastructure, allowing dominant firms to dictate the direction and pace of innovation and investment, and reducing the scope for product differentiation, these requirements can prevent smaller firms from competing with their larger rivals. In these ways, open access and interoperability can actually exacerbate the very problems that they were designed to address. Our analysis helps explain why important components of our financial infrastructure have become too-big-to-fail. It also helps explain why, despite their highly concentrated structure, U.S. securities clearing and depository markets have still been characterized by relatively high levels of innovation and investment. More broadly, our analysis suggests that coordination requirements will only constrain market power where the costs of building, maintaining, and connecting to common infrastructure are allocated in a way that does not discriminate against smaller firms, and where larger firms are not able to dictate decisions about innovation and investment. Where this is not possible, interoperability and open access are unlikely to forestall monopoly control, even though they may still improve market efficiency by exposing incumbents to the threat of new entry.