I line
No. 1 (the economic purpose test) of the Commodities Exchange Act does not serve the public interest. However, in my comments I will differ to some degree with Professor Silber's analysis. In my opinion, the assumptions and theory in the first part of Professor Silber's paper are both reasonably representative of the industry for the purposes of analyzing this particular question and the implications of this theory as developed by Professor Silber also seem to apply to futures contract innovation. As I understand these implications, the two primary ones are that (1) in an oligopolistic situation, rivalry between firms tends to stimulate innovation, and (2) roughly speaking, the possibility of dominating a market is the primary incentive to innovate.
However, I believe that Professor Silber is mistaken in his empirical description of the frequency of innovation in the industry, and that his interpretation of the social and private benefits of the two forms of contract innovation that he observes-namely, innovation in entirely new contract markets, and innovation by improving contract terms on an existing contracts-is mistaken. I feel that a case can be made, at least as of this date, that no exchange has as yet successfully developed a successful contract that was imitative of a contract of a rival exchange once the rival exchange achieved dominance. Since, as a empirical matter, most new contracts seem to be of an imitative sort, this appears to me to be an example of an inefficiency in this industry. However, since the full cost of this inefficiency is borne by the exchange introducing the imitative contract, I do not believe there is a regulatory need to prevent this activity. Futhermore, as Professor Silber correctly points out, the attempt by rival exchanges to capture the successful contract of another exchange does, in many cases, cause the exchange with the successful contract to improve its own contract in the process of stamping out the rival's cornpeting contract. Thus, although the benefit of this type of competition does not typically accrue to the imitator but rather to the original innovator, there does seem to be a net positive gain to this kind of rivalry from a social point of view.