Self-Regulation and Securites Markets

Abstract

Securities exchanges can police market abuses if government provides them the needed tools.

Securities markets cannot operate without trust. Investors can trust exchanges to regulate because of their powerful incentive to maximize trading volume. The many choices that investors have today remind exchanges that investor protection is a crucial part of their business. Investors will leave markets that fail to protect investors to find markets that will. Government regulation, by contrast, is unlikely to be as responsive to the needs of the securities markets and risks burdening investors with the cost of unnecessary regulation. If government provides exchanges with the necessary tools, financial markets can produce the regulation that encourages investor participation while retaining the powerful incentive provided by competition. As Adam Smith explained long ago, competition is the most powerful tool known for channeling man's baser instincts toward the social good. Securities regulation cannot afford to ignore that tool.

Keywords: Securities exchange, markets, investors, government regulation, self regulation, financial markets, firm regulation, law, finance

JEL Classification: L5, K22, G18, G28