T HE R OLE OF E XCHANGES IN S ECURITIES R EGULATION
Markets and the Demand for Exchanges
This data helps investors "price" the claim.41 In the stock example, a company with strong credentials—. They would like to be able to exit at a good moment, transfer the risk to another investor who wants to accept it and get back the capital they have left in the business. PA.L.REV investigating the effectiveness of private monitoring and assessment mechanisms in the grain industry); Barack D.
Exchanges and Capital Allocation
54 See, e.g., Karmel, supra note 4, at 159–60 (noting the origins of the New York Stock Exchange in 1792 when it was created following high volatility in the fledgling government securities market USA). Glosten, Insider Trading, Liquidity and the Role of the Monopolist Specialist, 62J.BUS a seminal article that articulates that market makers transact as uninformed traders and lose money to informed actors). The hypothesis of efficient capital markets has proven controversial, for example, by those who complain about the lack of explanation of irrational human behavior as an aspect of the price formation process.
The Significance of Exchange Oversight
C OMPETITION AND F RAGMENTATION IN M ARKET
The Rationale for Competition
Traditionally, securities traded on the exchanges where they were first listed.126 If a public company listed its shares on the NYSE, any investor wishing to buy and sell them in secondary trading would generally also have to go to. 122 Regulation National Market System Rule 611, Order Protection Rule, 17 CFR 242.611(a), which states that trading centers cannot execute a trade at a price inferior to one displayed at another venue and thus seeks to prevent " trade throughs" at a venue if the price is worse than one exhibited at another venue). 125 This article uses the term "national market" somewhat loosely and non-technically to refer to the collection of exchanges and alternative trading platforms that deal in nationally listed securities.
It is recognized that Regulation NMS and Regulation ATS use a more technical definition of the national market system to emphasize the venues that must report their offers in the ticker. Regulation has sought to find a solution to the problem of high investor costs through the creation of a national market system.135 Central to its design is the goal of ensuring that investors anywhere in the system can get the best price for their trade. 136 See Regulation National Market System Rule 611, Order Protection Rule, 17 CFR Regulation NMS—National Market System, Exchange Act Release No.
For an early explanation of the central objectives of the NMS of 1975, see the Securities Exchange Act, 15 U.S.C. For a description of the inception of the NMS and its structural goals, see Laura Nyantung Beny, USA. It should be noted that SEC Commissioner Piwowar called for a 10-year review of Reg NMS as part of the Regulatory Flexibility Act and invited comments on the effectiveness of NMS.
A central part of the national market system – indeed its central implementing measure – is the order protection rule.138 This rule prohibits trading centers from executing an order at a price lower than the best available price in the system.
The Rise of Alternative Trading Venues
SEC rulemaking has deliberately favored competition as a policy preference in market design.143 Regulation Alternative Trading Systems (Reg ATS) allows venues to trade nationally listed securities without being formally authorized as a Section 6 exchange under the Securities and Exchange Commission. exchange law.144 Under Reg ATS, broker-dealers can set up venues to match buyers and sellers – essentially performing as an exchange-like function – without being authorized as an exchange.145 This means that broker-dealers private platforms can establish to trade in securities or build their own communication networks to connect investors without first going through an exchange.146 Reg ATS allows broker-dealers to enjoy considerable leeway in their ability to establish non-exchange trading mechanisms, investor choice expand and reduce transaction costs .147. Key regulatory features: First, Act ATS requires trading platforms to register as an Alternative Trading System (ATS) with the SEC.149 As part of this process, ATS must provide disclosure regarding the core terms on which the ATS intends to operate. In this way, the Hedge Fund pays a higher price in the presence of the HFT prospector.
The National Market System requires exchanges to provide a continuous stream of buy and sell quotes in the Ticker to generate the best price on the Market. An ATS that represents less than 5% of the trading volume in a listed stock on the national market (here referred to as a 'regular' ATS) does not have to publish its prices on the ticker.154 This 5% threshold is not particularly demanding. Furthermore, it is not in an ATS's interest to exceed this 5% threshold and become subject to more stringent regulatory and reporting requirements.155.
Burns et al., SEC Adopts New Rules to Enhance Public Disclosure of Information and Regulatory Oversight of Alternative Trading Systems, WILKIE FARR & GALLAGHER. ATS surveillance can only apply to their subscribers' behavior on the venue itself - and not more broadly. Informational and transactional links: The interplay of the Order Protection Rule and Regulation ATS is transforming the informational and transactional architecture of the market.
Due to the order protection rule, trading centers are constantly providing offers to compete to offer the best price.
The Structural Impact of Competition
T HE D ECLINING P OWER OF E XCHANGE O VERSIGHT
The High Costs of Exchange Oversight
In order to monitor markets, detect bad behavior and punish errors, manipulation, fraud and disruption, supervisors must devote significant resources to this task. These include not only the finances needed to support the surveillance infrastructure, but also the time, expertise and reputational investments that signal quality and commitment to the task.186. For example, the NYSE established NYSE Regulation, a nonprofit subsidiary of the NYSE charged with leading the exchange's enforcement efforts.190 In addition, the exchanges have—to varying degrees—delegated their regulatory responsibilities to the financial industry. Regulatory Association (FINRA), a self-regulatory organization of broker-dealers.
It is worth noting that the NYSE returned its allocation to FINRA, so that NYSE Regulation was charged with enforcement. Listed companies would have sounder economic prospects and traders would behave better, attracting more investors and public companies to the scene. 193. To the extent that traders strategically choose where to trade at any given time, their decision-making increases the information costs that exchanges must bear in monitoring traffic.
As exchanges see steadily lower volumes and lower trading revenues, the motivation to spend on such analysis is likely to become less compelling. As for-profit institutions, stock exchanges face deep tension in meeting both their private responsibility to their own shareholders and their public responsibility to the marketplace.199. For example, it is common for exchanges to pay traders who bring liquidity to the venue.
Instead of simply charging a flat fee for transactions, venues can calibrate fees to reflect the benefit (in terms of liquidity) that any particular trader brings to the platform.
Information Gaps and Coordination Failure . 152
T HE C ASE FOR L IABILITY IN M ARKET D ESIGN
A Return to Consolidation?
A proliferation of dark pools – which can execute transactions without the usual compliance burdens that exchanges face – is siphoning off both large numbers of traders and information about them. The SEC's new rules demonstrate regulatory intent to preserve a place for dark pools as a competitor to traditional exchanges and do not change the premise of dark pools as venues that offer investors a lightly regulated, less open and often cheaper proposition for trading activities. Dark pools have proven successful precisely because they appear to have provided investors with services that they could not find or were unwilling to pay for on the illuminated public market.
While the lack of transparency from a regulatory perspective is legitimately a concern, it is clearly attractive to investors, driving volume and continued interest in dark pools. In addition to offering opacity, dark pools can also be cheaper by promising lower public exchange fees. Specifically, scholars have come to mixed conclusions about the impact of dark pools on key metrics of market quality, such as cost efficiency.
While a full discussion of this issue is beyond the scope of this article, opinions on whether dark pools are beneficial or harmful show deep differences of opinion. For example, experts point to the tendency of dark pools to welcome more uninformed traders into their arena than as a positive. As a result, public markets can be better informed.227 Dark pools can also help institutions dispose of large blocks of stock without disrupting the markets.
Taken broadly, some might suggest that these costs are offset by the gains to investor choice, or the potential benefits that dark pools provide to market quality.
A Case for Liability
Moreover, risks can spread from dark pools to exchanges (and vice versa) given common informational and logistical connections. A noticeable asymmetry in the policing burden borne by exchanges and dark pools thus appears formalistically. Regulators have proposed measures requiring dark pools to disclose more information about their operations.
First, an ex post compensation mechanism aims to foster better ex ante incentives for exchanges and dark pools to be rigorous in supervision. To the extent that exchanges and dark pools have their pocketbooks on the line, they can be expected to attack instances of misconduct more forcefully ex ante. Put simply, exchanges and dark pools should be seen to have, and in fact do have, a tangible stake in market surveillance.
Second, the threat of subsequent liability may reduce the incentives of exchanges and dark pools to take profitable risks at the expense of the market system. This fund can support losses caused by errors in the monitoring of exchanges and dark pools. This article shows that exchanges and dark pools cannot easily verify that others are supervising effectively.
A fund with shared liability can motivate exchanges and dark pools to better oversee each other's behavior.
