Transparency and Fragmentation: Financial Market Regulation in a Dynamic Environment

Transparency and Fragmentation: Financial Market Regulation in a Dynamic Environment

Transparency and Fragmentation: Financial Market Regulation in a Dynamic Environment

Transparency and Fragmentation: Financial Market Regulation in a Dynamic Environment

Synopsis

This is the first major treatment of the effects of increased transparency on financial markets: an important and highly controversial issue for both traders and regulators. Focussing on three main themes - market transparency, the consolidation-fragmentation of trading systems, and the scope of regulation (i.e. which markets, and which traders within those markets, should be subject to regulation), the book highlights the importance of these issues to all markets throughout the world. The authors draws on research from eight UK-based investment exchanges, Deutsche Borse in Frankfurt, and documentary evidence from the US markets and their regulators.

Excerpt

This chapter considers the changing structure of the securities industry. In particular, it analyses the centripetal forces pushing the trading of securities to consolidate on monopoly exchanges, and the centrifugal forces driving securities trading to fragment. ‘The tension between centrality, on the one hand, and competition, on the other, is probably the oldest of all market structure issues’ Arthur Levitt, Chairman of the SEC, Senate Banking Committee (SBC), 1999), and the current market structure reflects the present balance between these two opposite effects. ‘Today's technology may afford us the opportunity to better achieve these goals [to garner the benefits of centrality without stifling competition] – once thought to be mutually inconsistent’ ( Arthur Levitt, 1999).

Section 4.2 of this chapter outlines the structure of securities trading, and this includes a brief description of the evolution of securities exchanges, the increasing concentration of exchanges on the trading function, the cost advantages of screen-based trading, the demutualisation of exchanges and the possible consequences for corporate governance, a brief description of the role of brokers, and the rapid growth of ATSs. Section 4.3 defines fragmentation for the purposes of this chapter, and sets out the industrial economics approach towards market structure that will be used in subsequent sections. Section 4.4 details the main economic forces for the consolidation of exchanges – economies of scale and network effects, coupled with listing restrictions. Section 4.5 sets out some reasons why markets may fragment, and section 4.6 considers the effects of market fragmentation, relative to a consolidated market.

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