Document Type
Article
Publication Title
Cornell Law Review
Publication Date
2019
ISSN
0010-8847
Page Number
101
Keywords
exchanges, dark pools, high frequency trading, liquidity, spreads
Disciplines
Law | Securities Law
Abstract
According to statute, securities exchanges play an essential role in ensuring compliance with applicable laws and industry standards. Long imagined as unique in their institutional capacity to bring traders together, collect information and exclude problem participants from the marketplace, exchanges have offered an efficient source of private discipline for public regulators. The classic conception of the exchange, however, no longer holds true in today’s markets. Rather than concentrate activity within a handful of exchanges, equity markets are fragmented across a network of 14 exchanges and around 40 lightly regulated, off-exchange alternative venues (colloquially, “dark pools”).
This Article shows that the goal of exchange oversight is rendered unachievable in fragmented markets. First, exchanges no longer constitute the central forums for convening traders, who now enjoy enormous choice regarding where and how to trade. Fragmentation also increases the costs of performing oversight and reduces its effectiveness. Exchanges must work harder to collect information across multiple exchanges and dark pools. Tough enforcement can result in lost business. And the power to exclude traders from the exchange is weak where traders can move fluidly to other venues. Secondly, exchanges have incentives to under-invest in oversight. They reap private gains by winning business, but share the risks of losses with competitor exchanges and dark pools.
This Article proposes a structural solution to motivate stronger surveillance, outlining a new liability regime for exchanges and dark pools. Liability aligns the incentives of trading venues towards delivering oversight. In so doing, it helps recapture the benefits of consolidation, while maintaining competition in market structure.
Recommended Citation
Yesha Yadav,
Oversight Failure in Securities Markets, 104 Cornell Law Review. 101
(2019)
Available at: https://scholarship.law.vanderbilt.edu/faculty-publications/1121