Authors: Nicola Cetorelli, Beverly Hirtle, Donald Morgan, Stavros Peristiani, and João Santos

• Are concentrated markets—in which a relatively small number of firms hold large market shares—more likely to be disrupted than less concentrated ones? The answer is important to policymakers as well as other market participants concerned about potential threats to market stability.
  
  
• Cetorelli et al., drawing on academic research as well as introducing new analysis, consider the link between market concentration and the risk or severity of instability. Their review of how U.S. financial market structure has changed over the last decade finds no pervasive pattern of high and increasing concentration. According to the authors, most wholesale credit and capital markets in the United States are only moderately concentrated, and concentration trends are mixed—rising in some markets, falling in others.
  
  
• The article also identifies market characteristics that might lead to greater, or less, concern about the consequences of a large firm's failure in a concentrated market. In particular, it argues that prompt substitution by other firms is a critical factor supporting market resiliency. Substitution is a stabilizing force because it can dampen the upward pressure on prices attributable to the failure of a large firm.
  
  
• The authors’ findings can offer some reassurance to policymakers and others concerned about whether high or rising financial market concentration could suggest greater market instability.
  
  
• The study also makes several recommendations in light of its findings, such as monitoring market concentration and turnover trends and introducing public policies that enhance firm substitution within a given market. Such policies could include promoting standardization of products, ensuring rapid clearing of payments, and monitoring competition to ensure that key players do not become entrenched, and hence irreplaceable, because of privileged access to trading platforms or technologies.

Nicola Cetorelli is a senior economist and Beverly Hirtle a senior vice president at the Federal Reserve Bank of New York; Donald Morgan, Stavros Peristiani, and João Santos are research officers at the Bank.

The views expressed in this summary are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.