The Failure of Market Efficiency
69 Pages Posted: 30 Apr 2022
Date Written: April 28, 2022
Recent years have witnessed the near total triumph of market efficiency as a regulatory goal. Policymakers regularly proclaim their devotion to ensuring efficient capital markets. Courts use market efficiency as a guiding light for crafting legal doctrine. And scholars have explored in great depth the mechanisms of market efficiency and the role of law in promoting it. There is strong evidence that, at least on some metrics, our capital markets are indeed more efficient than they have ever been. But the pursuit of efficiency has come at a cost. By focusing our attention narrowly on economic efficiency concerns—such as competition, friction, and transaction costs—we have lost sight of other, deeper values within our economic system, including wider conceptions of duty, fairness, and morality. And while regulators sometimes pay lip service to these values, they often treat them as merely a subset of efficiency: the best way to treat investors fairly, to promote equality, and to prevent immoral, exploitative behavior, in this view, is simply to create an efficient market. We have seen the consequences of this emphasis play out in spectacular fashion in the last decade. New market structures and technologies, from special purpose acquisition companies to social-media oriented trading apps to cryptocurrencies, have emerged to eliminate barriers to trade and compete with institutional incumbents. These strategies may well lead to more efficient markets in so much as they facilitate access to capital, but they also have the side effect of placing unsophisticated regular citizens into complex contractual arrangements with sophisticated market actors. The result is an “efficient” market, but one with steep moral and social costs. This Article examines the limits of market efficiency as a regulatory goal and suggests a set of structural and substantive reforms aimed at better balancing efficiency with the other goals of markets. It concludes that regulators, courts and scholars alike need to adopt a more comprehensive understanding of the proper ends of market regulation, one that emphasizes the purpose and spirit of finance over the false promise of efficiency.
Keywords: financial regulation, fintech, SPACs, meme stocks, social trading apps, corporate law, mergers & acquisitions, M&A, cryptocurrencies, bitcoin
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