The Future of United States Securities Regulation in an Age of Technological Uncertainty

Abstract:     
The evolution of information technology will determine the future structure of the world's financial markets. A nuanced appreciation of technology and its implications for financial markets is therefore essential to the design of a successful, modern securities regulation regime. Although the SEC currently ranks as among the most successful federal agencies in responding to changes in information technology, its ability to stay abreast of new developments is open to question. The agency appears to lack an adequate number of staff that are adept in more advanced implications of information technology. It also has no articulated technology strategy.

This paper expands on the need to develop a technology strategy and provides five distinct examples of initiatives that could emerge from a more affirmative approach to information technology. These examples suggest: (1) a software-based open architecture redesign of EDGAR; (2) a more aggressive role for the SEC in the definition of financial XML and its integration into the disclosure regime; (3) the use of an open API structure to resolve market fragmentation issues generated by the emergence of ECNs and other novel marketplaces; (4) the application of Internet technology to provide individualized trading risk measures that could be responsive to the agency's concerns regarding suitability; and (5) the application of on-line authentication techniques to reduce the risk of "counterfeit" disclosures, such as those which adversely affected Emulex's and Pairgain's stock prices.

Working Paper Series