CFA Urges Federal Reserve to Press Pause on Morgan Stanley-E*Trade Merger Review

Harm to Consumers and Competition from Vertical Integration Must Be the Focal Point of Every Merger Review

Washington, D.C. – In recent comments the Consumer Federation of America called on the  Federal Reserve to pause the review of the proposed Morgan Stanley-E*Trade merger during the pandemic. When the review begins in the new “normal” of the post-pandemic world, all agencies with oversight over mergers must apply rigorous analysis to the numerous concerns around vertical integration and heed calls to significantly ramp up antitrust scrutiny.

The comments argue that lax antitrust enforcement throughout the last few decades has led to growing concerns about increasing abuse of market power resulting not only from horizontal concentration (mergers of head-to-head competitors) but also from vertical integration of complementary services. The Morgan Stanley-E*Trade merger would be a particularly egregious example of the latter.

The comments also point out that Morgan Stanley opposed the introduction of competition into the market for securities, competition that has resulted in dramatic decreases in fees charged to consumers and increases in consumer choice. Morgan Stanley would not only cease competing on price and choice in the online and discount brokerage market, but would also use E*Trade’s customer relationships to bundle its own products, making it all the more difficult for firms that compete for Morgan Stanley’s core business to attract customers, even though the products in the bundle are inferior.

“The proposed Morgan Stanley-E*Trade merger raises the most important, difficult, and troubling of the anticompetitive impact of vertical mergers,” Mark Cooper, CFA’s Director of Research, said. “A major player in full-service brokerage, investment management, and investment banking has proposed to acquire a firm among the largest independent players in the online brokerage market.”

“While not at this time strong direct (or horizontal) competitors, they cannot claim that there are no potentially significant anticompetitive and anti-consumer harms. Indeed, these anticompetitive effects of vertical and complementary mergers have been recognized as a major concern.  Each of the markets that would be impacted by the merger are likely to suffer important negative effects,” said Cooper.

The comments point to extensive antitrust and economic literatures that support CFA’s concern that Morgan Stanley may leverage the acquisition to steer a larger customer base toward their own products, creating bundles of products that undermine consumer sovereignty and make it more difficult for other firms to compete.

On top of these issues, the COVID-19 pandemic has shed new light on market concentration concerns. With many small businesses struggling and larger companies able to adapt and dig into their substantial reserves, it is not yet clear what the effects of the pandemic on competition will be. In light of this uncertainty, Sen. Elizabeth Warren (D-Mass.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) are calling for a moratorium on mergers involving large companies.

“This is not a moment for business as usual,” said Amina Abdu, CFA’s Antitrust Advocacy Associate. “It’s an opportunity to step back and take stock of growing market concentration. Antitrust authorities should take this time to pause review on the Morgan Stanley-E*Trade merger and, when the time is right to come back, exercise proper scrutiny toward the potential anticompetitive effects of vertical mergers, both in this case and more broadly.”