Regulating Trading Practices

Abstract

High-frequency trading, dark pools, front-running, phantom orders, short selling — the way securities are traded ranks high among today’s regulatory challenges. It has become commonplace, both in financial and in academic circles, to call for the government to intervene and impose order. From a historical and empirical perspective, however, many of the recent developments look less dramatic than some observers believe. This is the essence of the present chapter. It explains how today’s regulatory regime evolved, identifies the key rationale for governments to intervene, and analyzes the rules, regulators, and techniques of the world’s leading jurisdictions. The chapter’s central argument is that governments should focus on the price formation process and ensure that it is purely market-driven. Local regulators and self-regulatory organizations will take care of the rest.

Keywords: stock exchanges, securities trading, standardization, self-regulation, state intervention, price formation, price discovery, algorithmic trading, short selling, market fragmentation

JEL Classification: D47, G14, G15, G18, G23, G28, K22, N20, N40