Document Type

Article

Publication Date

1992

Center/Program

Richard Paul Richman Center for Business, Law, and Public Policy

Center/Program

The Charles Evans Gerber Transactional Studies Center

Abstract

To the handful of traders who founded the New York Stock Exchange (NYSE) in 1792-and perhaps even to the securities traders of the 1960's-today's securities markets would be virtually unrecognizable. New communications and data processing technologies, the globalization of investment portfolios, and a surge in trading volume have created new needs and possibilities. As a result, revolutionary advances have occurred in the design and performance of execution systems: the technologies (computers, telephones, modems) and formats (auction-based stock exchanges, dealer-based "over-the-counter" markets, computerized single price auctions) that traders use to conduct trades. These advances enable trades on the NYSE, the regional exchanges, the over-the-counter markets, and emerging computerized execution systems to be conducted more rapidly, more accurately, and more inexpensively than ever before.

Amid this era of transformation, most critics have called upon the Securities Exchange Commission (SEC) to mandate a single type of execution system, 1 something the SEC has refused to do. Some critics diagnose this reluctance as a symptom of regulatory "capture." For example, Jonathan Macey and David Haddock suggest that the SEC does not regulate more intrusively because it is unwilling to offend various special interests. 2

This Note argues that the SEC acted wisely in choosing a strategy of "benign restraint," rather than designating a single, preferred execution system. Although the motives of the SEC are difficult to discern, it is unlikely that the agency has been "captured" by special interests.3 Regardless of the SEC's reasons, however, this Note claims that the SEC's restrained regulatory strategy is the best one. To develop this argument, Part I describes the goal pursued by the SEC-insuring that the securities markets will maximize societal wealth-and the problems associated with nurturing such a market. Part II describes recent manifestations of the SEC's restrained regulatory strategy. Part III then considers criticisms of the SEC's approach. Finally, Part IV discusses the advantages of benign restraint.

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