Academic journal article Journal of Corporation Law

Discrimination Platforms

Academic journal article Journal of Corporation Law

Discrimination Platforms

Article excerpt

I. INTRODUCTION...................810

II. The Main Trading Platforms Today................812

A. Exchange Trading Platforms..............812

B. Off-Exchange Trading Platforms.......................814

1. Alternative Trading Systems................814

2. Internalizing Trading Platforms...................816

III. TRANSPARENCY................818

A. Exchange Trading Platforms................818

1. Transaction Transparency..................819

2. Quote Transparency..............819

B. Off-Exchange Trading Platforms...................820

/. Alternative Trading Systems................820

a. Transaction Transparency.....................820

b. Quote Transparency.................821

2. Internalizing Trading Platforms.............822

a. Transaction Transparency..................822

b. Quote Transparency................... 822

IV. Trader Access...........823

A. Exchange Trading Platforms................823

B. Off-Exchange Trading Platforms................823

1. Alternative Trading Systems................823

2. Internalizing Trading Platforms................824

V. Policy Implications.............825

A. Investor Protection.................826

B. Stock-Price Accuracy.................829

VI. Conclusion.............831

I. Introduction

Since its emergence over the past ten to fifteen years or so, the new stock market has generated much controversy.2 During that time, fact-based analysis and coverage of market regulation and practices have often been outnumbered by fiction. The experience to date with respect to the distinction between exchange and off-exchange trading transparency serves as a prime example of the disconnect between description and fact. As with so many aspects of stock trading, when it comes to this one, exchanges are put up on a pedestal, and off-exchange platforms demonized. The former are the model for the ideal of the upright marketplace, the latter a symbol of the underworld of unchecked capitalism.3 But in reality, exchanges are far less transparent than thought, and off-exchange platforms the opposite.

This Article debunks much of the transparency distinction, and attempts to shift the regulatory, scholarly, and popular focus toward a clear-cut distinction that has received far less attention. This other distinction relates to trader access. The law allows off-exchange platforms to discriminate among traders, while requiring exchanges to remain open to all. This access distinction, the Article argues, matters for two core concerns of modern securities regulation: investor protection and stock-price accuracy.4 I therefore conclude by calling for the access distinction to be removed from the transparency-focused blind spot. In particular, I call for additional study by commentators and policymakers, with a focus on the precise nature of the segmentation of the stock market by investor type that is taking place due to the access rules.

The new stock market is complex, with trading of most individual public stocks occurring across about a dozen exchanges and well over a hundred off-exchange platforms. AT&T stock is no longer predominantly traded on the floor of the New York Stock Exchange. Instead, it is bought and sold through about a dozen electronic exchanges, 50 or so alternative trading systems (ATSs), and an even larger number of internalizing platforms.

Regulatory distinctions among these various trading platforms add to the complexity. The most widely noted distinction relates to the transparency of exchanges versus the opaqueness of ATSs and internalizing platforms. The latter two-the off-exchange platforms-arc said to compose the "dark" part of the American stock market, the former the light one. But as I show, these labels are overbroad, if not wrong altogether.

All the while, the trader-access distinction has received little attention. …

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