Academic journal article Journal of Corporation Law

Stock Market Futurism

Academic journal article Journal of Corporation Law

Stock Market Futurism

Article excerpt

The future is already' here. It 's just not evenly distributed.

-William Gibson1

If you shift everyone else 350 microseconds into the past, then it 's like you perpetually live in the future.

-Mattt Levine2

I. Introduction.795

II. The Stock Market Transformed.797

A. Yesterday 's Stock Market.798

B. Today 's Stock Market Menagerie.799

C. Consequences of the Regulatory Distinction.800

1. The Effects of Exchanges ' Liability Limits.801

2. The Effects on Exchanges' Conflicts of Interest.802

III. Forces of Convergence and Complexity.802

A. Exchange by Broker-Dealer.802

B. Brokerage by Exchange.803

C. Structural Interventions.805

IV. Stock Market Futurism.807

A. Visions of the Stock Market 's Future.807

I. One Self-Regulatory Status.807

B. Continued Disaggregation and Venue Choice.808

V. Conclusion.808

I. Introduction

The U.S. stock market is undergoing extraordinary upheaval. Over the last few decades, technology and regulatory change have profoundly altered how equities are traded, moving the market from a manual, human-driven system where trading volume for a given stock was largely concentrated in a single venue to today's "open architecture" system in which trading is automatized and electronic, and transactions in a company's stock potentially occur across a huge number of trading venues of differing types. 3 The approval of IEX's application to become the nation's newest stock exchange, including its famous "speed bump," was one of the SEC's most controversial decisions in decades.4 Other exchanges have proposed a raft of new innovations in its wake. 5 Yet while the market has changed dramatically, the regulatory regime has remained largely the same. This Symposium paper focuses on a major piece of that system that seems especially creaky- the regulation of trading venues-and the sharp regulatory distinctions current law draws among different kinds of marketplaces. Specifically, the central argument of this paper is that a series of functional trends have weakened the case for our current venue categorization system and strengthened the case for moving toward a single regulatory status for trading venues. It then considers possible reforms of market structure.

Current law creates two distinct regulatory statuses for equity trading venues. First, there are stock exchanges, which the law regulates as self-regulatory organizations (SROs), whose rules are subject to SEC scrutiny and approval, and enjoy absolute immunity from private suit when pursuing their regulatory functions.6 All other venues are regulated as broker-dealers, and can be broken down further as either alternative trading systems (ATSs) (which meet the statutory definition of an exchange but enjoy an exemption), or non-ATS non-exchange venues. The law freights the distinction between exchange and broker-dealer with considerable regulatory baggage for historical reasons, distinguishing pointedly between exchanges as SROs and all other venues as ordinary broker-dealers. The emphasis here will be on the way in which a variety of trends-some newer than others- undermine the case for these sharp legal distinctions among venues.

In this Introduction, we will very briefly sketch these trends and why they erode the current regulatory scheme's logic. First, ATSs have taken on increasing importance. They perform many of the same social functions as exchanges have traditionally performed and many have a trading structure that in many regards functions just like an exchange.7 Moreover, transaction volume on ATSs has been increasing significantly. Second, stock exchanges increasingly offer services designed to mimic sophisticated trading strategies- a role once reserved for traditional brokers executing orders for their institutional clients.8 In essence, many broker-dealers are looking more like exchanges, and many exchanges arc providing services previously provided only by broker-dealers. …

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