Academic journal article Journal of Corporation Law

Antitrust Violations in Securities Markets

Academic journal article Journal of Corporation Law

Antitrust Violations in Securities Markets

Article excerpt


Markets are a product of human creativity, not of nature. They can be designed well or poorly, and a market's efficiency is mainly a consequence of its design. A market where many buyers and sellers participate will ordinarily be more competitive than one in which participation is restrained. A market in which acquiring, holding, and selling goods is cheap works more efficiently than one in which trading is costly.1 A market where information flows easily will clear more efficiently than one in which it is limited. And a market in which contracts are enforceable will work better than one in which they are not.2 Often the government plays a vital role in determining the rules that govern a market and thus bears a significant responsibility for determining how efficiently it will perform.3 Gilson and Kraakman's important article illustrates the amalgam of private creativity and government oversight that gives us an efficient securities market.4

While markets can be created by private participants,5 by governments, or some combination, the comparative advantage generally lies with private participants. Collectively, they have strong incentives to make a market work, namely their profits. They also have the most practical knowledge. Participants are not invariably the best market managers, however, because their incentives are purely private. They wish to maximize their own wealth, not that of society in general. This divergence between private and public interest is most likely to be a problem when some subset of participants makes the rules, leaving other participants out. For example, if sellers make the rules they may fix prices or find other means of protecting themselves from competition.6 If buyers make the rules they might do just the opposite.7

Nonetheless, privately made rules are produced mainly by sellers. This practice is structurally efficient because the sellers are specialists, professionals, homogenous, and reasonably concentrated. Buyers are more typically a mixture of specialists and non-specialists. Many of them are amateurs, their interests are diverse and they are numerous. So sellers are typically more efficient rule makers, but they have the typical sellers' self-interest, thought to require regulation mainly to protect purchasers.

While investment bankers and other underwriters are perhaps more aligned with sellers, stock brokers represent both buyers and sellers. As a result, they should not be systematically biased either way. Of course they represent their own interests, which may not coincide with the public's. Nevertheless, American securities markets such as the stock exchanges are competitively structured. They do not exhibit any of the indicia of natural monopoly thought to justify invasive government regulation of price and output-such as, say, retail electricity.8 Nor are there costly hardware facilities that must be shared, as in the telephone industry.9 The principal phenomenon limiting competition in securities markets is restraints on information, as Gilson and Kraakman so well point out.10

This essay briefly examines the role and limits of the antitrust laws in maintaining efficient capital markets. Here, as is often the case in regulated industries, the antitrust laws are a "residual" regulator, just as contract and tort law. Their purpose is not to impose prices or output decisions on firms or to make first instance supervisory rules. Rather, antitrust's duty is to disapprove rules or practices that are found to be anticompetitive. This almost always occurs after the fact. Typically, a rule or practice is already underway and one or more plaintiffs, or perhaps the government, challenges it as anticompetitive. Thus the default rule is legality: actions and agreements in the securities industry are lawful insofar as antitrust is concerned unless antitrust has stated a rationale for condemning them.

It is also worth noting that antitrust has no moral content and is unconcerned about the distribution of wealth. …

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