Evaluating Stock-Trading Practices and Their Regulation

Abstract

High-frequency trading, dark pools, and the practices associated with them have come under tremendous scrutiny lately, giving rise to much hot rhetoric. Missing from the discussion, however, is a principled, comprehensive standard for evaluating such practices and the law that governs them. This Article fills that gap by providing a general framework for making serious normative judgments about stock-trading behavior and its regulation. In particular, we argue that such practices and laws should be evaluated with an eye to the secondary trading market’s impact on four main aspects of our economy: the use of existing productive capacity, the allocation of capital, the allocation of resources over time, and the allocation of risk. Three additional considerations should also be taken into account: the amount of resources consumed by the operation of the market, the market’s ability to innovate, and fairness.