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Trading Places: Securities Regulation, Market Crisis, and Network Risk


Olufunmilayo Arewa


University of California, Irvine School of Law

January 8, 2009

Northwestern Law & Econ Research Paper No. 09-01
Northwestern Public Law Research Paper No. 09-01

Abstract:     
The rising power of traders has fundamentally transformed financial market networks and risks. Further, the increased complexity of traded securities and trading strategies within financial networks has magnified shortcomings of existing industry risk management practices as well as dominant regulatory regimes. Financial markets are ultimately places where people trade. Broader social and technological changes have altered the nature of trading activities in financial markets. Innovations in technology, financial instruments, and trading strategies have increased financial market efficiency but have also transformed sources of financial market risks. Financial market networks heighten the need for fundamental rethinking of financial market regulation and reassessment of ways both regulators and market participants can better manage risk. This article evaluates the importance of financial networks and related factors such as globalization, complexity, and secrecy for financial markets. This article argues that, as recommended in a recent Department of Treasury Blueprint for future financial market regulation, U.S. adoption of a modified "Twin Peaks" model of regulation may provide for more efficient and effective regulation of financial market activities and risk and help avoid future market crises. This model would move portions of regulatory oversight of existing functional regulators such as the Securities and Exchange Commission into new regulatory bodies that regulate by objective and would establish a separate regulatory function for market risk and market stability oversight. Adoption of this model, combined with the establishment of specific core financial market regulatory principles, should enable regulators and market participants to manage risk more effectively.

Number of Pages in PDF File: 90

Keywords: trading, securities regulation, compensation, credit crisis, risk, financial market regulation, SEC, derivatives, globalization, secrecy, incentives, regulation, financial market reform, financial networks

JEL Classification: K22

working papers series


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Date posted: January 9, 2009 ; Last revised: February 6, 2009

Suggested Citation

Arewa, Olufunmilayo, Trading Places: Securities Regulation, Market Crisis, and Network Risk (January 8, 2009). Northwestern Law & Econ Research Paper No. 09-01; Northwestern Public Law Research Paper No. 09-01. Available at SSRN: http://ssrn.com/abstract=1324951 or http://dx.doi.org/10.2139/ssrn.1324951

Contact Information

Olufunmilayo Arewa (Contact Author)
University of California, Irvine School of Law ( email )
535A Administration
Irvine, CA 92697-1000
United States
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