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November 1, 2001

Regulation of U.S. Equity Markets

By Editorial Staff

Also in this article

  • Regulation of U.S. Equity Markets

Robert A. Schwartz, Editor

(Kluwer Academic Publishers, Norwell, Mass., 154 pages) $69.95.

Reviewed by Gregory Bresiger

Should markets be re-invented by regulators? Should regulators, or possibly lawmakers, impose some competitive platform on the securities industry? Or should markets be allowed to naturally evolve, with the regulators only acting as umpires, who merely intervene to ensure fair play?

These are some of the questions that are discussed - but by no means settled - in this interesting little book, which was the result of a one-day conference on market regulation that was held on March 17, 1999 at the Zicklin School of Business at Baruch College in New York City.

The book is mainly a series of dialogues among various market participants. Some of them believe the regulatory moves of the past few decades have ensured fairer markets. Others believe regulators and lawmakers have gone too far and that, for example, the order handling rules were too extreme.

Market Centers

Professor Schwartz, an academic expert on market structure, outlines the issues in the preface. He argues that one of the key problems of market structure is that order flow inevitably backs up in major market centers. This leads to the fear of monopolistic power. Of course, this could raise the ancillary issue of anti-trust policy in general and if one can truly say that a business that has achieved dominance in a market by simply performing better than all its competitors is a monopoly. Professor Schwartz also raises the issue of order flow going across several markets causing market fragmentation. He also seems to be arguing that regulation and the interference with the spontaneous forces of the market are inevitable.

"But the SEC cannot be involved in the production, distribution and pricing of information without interfering with the natural formation of a marketplace, and a commonly expressed fear is that regulatory intervention can have consequences that are difficult to predict and very hard to control," he writes (page xv).

Professor Schwartz's point is well taken. Indeed, in some areas of our economy government regulation began as a kind of reform, but led to greater and greater regulation until the government ended up taking over (See the history of American railroads).

He relates much of this controversial policy of regulation and anti-trust to the trading industry by posing these interesting questions: "Given the importance of network externalities in trading, how appropriate is U.S. anti-trust policy for the equity markets? Does the regulatory process facilitate the competitive process, or impede competition because of regulatory capture and the typically difficult protracted process of getting regulatory approval?" (page xv).

In lively panels that Professor Schwartz moderates, there's no shortage of answers to these daunting questions. For example, Steven Wunsch, president of the Arizona Stock Exchange, insists that the secret of the success of the American stock markets has been their relative lack of regulation compared to Europe. "While regulation has been useful to prevent fraud and abuse, the secret of our success is that we did not have regulation around when our markets formed. They were able to form naturally." (page 17).

Anti-Trust