Lending a Hand to the Invisible Hand: How a National Market System Contributes to the Evolution of the U.S. Securities Marketplace

Abstract:     
In 1975, Congress directed the Securities and Exchange Commission to facilitate the establishment of a national market system for securities. Dissatisfied with the increasing fragmentation of and barriers to interaction among the equities markets, Congress vested the Commission with the authority to work with the exchanges and over-the-counter market to create linkages among markets through communications and data processing facilities. Congress found that a national market system would "foster efficiency, enhance competition, increase the information available to brokers, dealers, and investors, facilitate the offsetting of investors' orders, and contribute to best execution of such orders."

As a result of the technological revolution in the securities industry over the past quarter century, some commentators have suggested that the Commission's mandate to facilitate a national market system, far from strengthening markets, has limited the benefits of competition among markets. Market forces acting alone, it is argued, are sufficient to ensure that investors not only receive the information they need to make informed investment decisions, but also to assure execution of their orders in the most efficient manner possible. Government intervention, moreover, is said to have entrenched outdated linkages and communications systems that impede evolution in today's securities marketplace.

The core purpose of authorizing regulatory intervention to facilitate a national market system, however, remains as important today as it was in 1975: to eliminate anticompetitive burdens and ensure cross-market access to market information and trading opportunities, so that market forces can promote the evolution of a market structure that benefits the end users of the securities markets - investors and issuers. Despite the rapid changes in the marketplace resulting from new technology and competition, the commercial incentives of markets and market intermediaries remain sufficiently misaligned from the interests of investors and issuers that a market structure dictated solely by market forces may be inefficient absent regulatory intervention. While the precise approaches to implementing a national market system must naturally change with the times, there is a role for regulation in ensuring that the evolution of the U.S. securities marketplace unfolds in a manner that benefits investors and serves the public interest.

Keywords: national market system, stock exchange, stock market, Securities and Exchange Commission

working papers series