Information Technology & the Securities Markets: The Challenge for Regulators
Wallman, Steven M. H., Brookings Review
Massive technological advances, including the increasingly widespread acceptance of the Internet, are revolutionizing U.S. financial markets. Information flows are becoming seamless and borderless, instantaneous and almost costless. The swift changes so far and the still more rapid changes ahead offer opportunities for new value-added services, for new competitors, and for new forms of competition. They also underline the need for new thinking about regulating the nation's financial markets.
TECHNOLOGY AND THE SECURITIES MARKETS
New information technology has already transformed the securities markets. Order handling has largely been automated by mid-size and larger firms. Mutual funds are using the Internet to communicate with investors and to offer and distribute shares. Corporate issuers, large and small, offerings on the Internet. Investors are starting to bypass traditional exchanges and dealer-based trading systems, using electronic networks to deal directly with each other at lower cost. Retail customers are trading stock on-line rather than calling or visiting a live broker. Certain small issuers have used the Internet to establish secondary trading markets for otherwise fairly illiquid stock without the benefit of the usual market intermediaries.
In the decade ahead, the continued growth of the Internet and its successors will present even greater opportunities for expansion and innovation in financial services, especially as consumers become more wired and more comfortable with electronic communications technologies and as security and confidentiality issues are resolved. The effects will be felt throughout the financial sector. And as the marketplace adapts to new technology, so must regulation.
Information Access and Analysis. Companies conveying more information about themselves through the Internet will level the information playing field between individual investors and institutional investors. Eventually, relatively instantaneous access to portions of management information systems will permit investors to analyze raw financial information as soon as it becomes available--information now aggregated, at great cost, into quarterly and annual financial statements. Improved telecommunications technology, combined with better analytics, search technology, and intelligent (or "smart") agent technology, will allow the market better to learn, absorb, and act on information, leading to more precise pricing of and innovative transacting in securities. Ultimately the perceived information risk of an investment will decline and, consequently, so will the corresponding cost of capital.
Corporate Governance. Electronic annual meetings will supplement and then replace "physical" ones. On-line voting will lead to more shareholder voting. Eventually, annual meetings may disappear altogether. Investors will use the equivalent of "chat rooms" to discuss company business. Shareholder activism will be energized. When a company needs improvement, shareholders will be able to use "voice"--corporate governance to enhance shareholder value--in real time, Just as they use "exit"--selling their shares--today.
The Role of Intermediaries. Intermediaries who provide primarily communications without otherwise adding value (such as through analysis) will be replaced, sometimes by new intermediaries and new types of intermediation, and sometimes just by the technology itself. Offerings will be conducted electronically without masses of salespeople working for underwriters. Traditional exchanges and broker-dealers will transform themselves and provide new services.
Software providing "expert" financial planning advice for investors will eventually surpass in quality that provided by many human financial planners. Smart agents will compile an investor's portfolio over the Internet, executing trades with increasingly less participation by the investor, providing convenience, speed, and diversification at low cost. …