The U.S. stock market has been transformed over the last twenty-five years. Once a market in which human beings traded at human speeds, it is now an electronic market pervaded by algorithmic trading, conducted at speeds nearing that of light. High-frequency traders participate in a large portion of all transactions, and a significant minority of all trade occurs on alternative trading systems known as "dark pools." These developments have been widely criticized, but there is no consensus on the best regulatory response to these dramatic changes.
The New Stock Market offers a comprehensive new look at how these markets work, how they fail, and how they should be regulated. Merritt B. Fox, Lawrence R. Glosten, and Gabriel V. Rauterberg describe stock markets' institutions and regulatory architecture. They draw on the informational paradigm of microstructure economics to highlight the crucial role of information asymmetries and adverse selection in explaining market behavior, while examining a wide variety of developments in market practices and participants. The result is a compelling account of the stock market's regulatory framework, fundamental institutions, and economic dynamics, combined with an assessment of its various controversies. The New Stock Market covers a wide range of issues including the practices of high-frequency traders, insider trading, manipulation, short selling, broker-dealer practices, and trading venue fees and rebates. The book illuminates both the existing regulatory structure of our equity trading markets and how we can improve it.
The U.S. stock market has been transformed over the last twenty-five years. Once a market in which human beings traded at human speeds, it is now an electronic market pervaded by algorithmic trading, conducted at speeds nearing that of light. High-frequency traders participate in a large portion of all transactions, and a significant minority of all trade occurs on alternative trading systems known as "dark pools." These developments have been widely criticized, but there is no consensus on the best regulatory response to these dramatic changes.
The New Stock Market offers a comprehensive new look at how these markets work, how they fail, and how they should be regulated. Merritt B. Fox, Lawrence R. Glosten, and Gabriel V. Rauterberg describe stock markets' institutions and regulatory architecture. They draw on the informational paradigm of microstructure economics to highlight the crucial role of information asymmetries and adverse selection in explaining market behavior, while examining a wide variety of developments in market practices and participants. The result is a compelling account of the stock market's regulatory framework, fundamental institutions, and economic dynamics, combined with an assessment of its various controversies. The New Stock Market covers a wide range of issues including the practices of high-frequency traders, insider trading, manipulation, short selling, broker-dealer practices, and trading venue fees and rebates. The book illuminates both the existing regulatory structure of our equity trading markets and how we can improve it.
Seeking to present a conceptual framework with which to understand the recent changes in stock markets and their regulatory practices, the book, rather than casting new forms of trading as uniformally good or bad, would offer new ways of approaching and regulating the new market.
Acknowledgments
Introduction
Part 1: Foundations
1. The Institutions and Regulation of Trading Markets
2. The Social Function of Stock Markets
3. The Economics of Trading Markets
Part 2: Trading Market Practices
4. High Frequency Trading
Part 3: Regulation of Traders
5. The Economics of Informed Trading
6. The Regulation of Informed Trading
7. Manipulation
8. Short Selling
Part 4: Regulation of Broker-Dealers
9. Broker-Dealers
10. Dark Pools
11. Maker-Taker Fees
12. Payment for Order Flow
Conclusion
Notes
Name Index
Subject Index
Merritt B. Fox is the Michael E. Patterson Professor of Law at
Columbia Law School, codirector of the Program in the Law and
Economics of Capital Markets, and codirector of the Center for Law
and Economic Studies.
Lawrence R. Glosten is the S. Sloan Colt Professor of Banking and
International Finance at Columbia Business School and codirector of
the Program in the Law and Economics of Capital Markets.
Gabriel V. Rauterberg is an assistant professor of law at the
University of Michigan Law School.
In immensely readable fashion, The New Stock Market connects the
fundamentals of market structure to new (and old) challenges:
insider trading, market manipulation, high-frequency trading. A
profoundly important look at how our stock markets have changed and
the regulatory first principles necessary to keep them orderly and
equitable as these changes continue.
*Donald Langevoort, Georgetown University*
The New Stock Market is a truly impressive achievement. It deserves
an audience not only among scholars to whom its intellectual
framework is already familiar but also among practitioners.
Analysts, portfolio managers, risk managers, and C-suite executives
who read this book will afterward stand on much firmer ground when
opining on prospective securities legislation and regulation.
*Enterprising Investor*
Integrating the perspectives of information economics and the law
for understanding markets for trading equity, this book will be of
considerable interest to students of markets and the law, as well
as securities lawyers, investment bankers, analysts, economists,
and regulators.
*Chester Spatt, Carnegie Mellon Tepper School of Business and MIT
Golub Center for Finance and Policy*
The New Stock Market achieves a difficult balance: it is accessible
yet sophisticated. The mysterious new terms of market
microstructure—"high-frequency trader," "dark pool," "maker-taker"
rebates, and "internalization"—are all fluently explained, and this
serves as a prelude to the authors' careful weighing of the policy
choices. Few books in this area have been this lucid and this
rigorous at the same time.
*John C. Coffee, Columbia University*
Equity capital markets are going through unprecedented change: new
technology, new players, new venues, and new trading strategies.
How can regulators respond to these developments without impeding
market efficiency? These are the issues that Fox, Glosten, and
Rauterberg analyze in their outstanding book, providing vital—and
novel—insights and recommendations that should be welcomed by both
regulators and investors. Highly recommended.
*Edward F. Greene, Cleary Gottlieb Steen & Hamilton*
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