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The U.S. stock market is undergoing extraordinary upheaval. The approval of the application of the Investors Exchange (IEX) to become the nation’s newest stock exchange, including its famous “speed bump,” was one of the SEC’s most controversial decisions in decades. Other exchanges have proposed a raft of new innovations in its wake. This evolving equity market is a critical piece of national infrastructure, but the regulatory scheme for its institutions is increasingly frayed. In particular, current regulation draws sharp distinctions among different kinds of markets for trading stocks, treating stock exchanges as self-regulatory organizations immune from private civil litigation, while regulating all other trading venues as ordinary broker-dealers. This paper argues that three developments have weakened the case for this regulatory regime. First, in a variety of ways, off-exchange venues have become more like exchanges. Transaction volume on non-exchange venues has increased sharply, and many of these venues are now structurally similar to exchanges in many respects. Second, stock exchanges increasingly offer services designed to mimic sophisticated trading strategies – functionalities once reserved for broker-dealers acting on behalf of their institutional customers. Third, exchanges, which may have once seemed like neutral umpires – providing a rules-based forum to facilitate trade – have begun to tailor their market structure to favor some types of traders at the expense of others. Following the IEX approval, other exchanges have proposed their own uniquely designed speed bumps – sometimes with opposite intentions to IEX – as well as other new market structures. In a variety of ways then, the differences among the trading venues have eroded. Yet, the regulatory status of these venues remains widely distinct. The result is a set of sharp regulatory distinctions that no longer track as sharp functional differences. We discuss these trends and analyze the criteria by which the SEC has been regulating them. The SEC has approved many of these developments, and will have to pass judgment on far more to come. Its decisions, however, are not the product of any comprehensive vision of what our stock market should look like. This is not surprising because so far no such vision has been converged upon by any of the likely sources: the SEC, industry participants, or academic commentators. We sketch some broad possibilities for alternative market structures as the SEC looks towards the stock market’s future.


Business Organizations Law | Law | Property Law and Real Estate | Securities Law


Program in the Law and Economics of Capital Markets