New Paper Explores Stock Market’s Most Controversial Practices

Analysis by Columbia Professors Offers a Comprehensive Framework for Understanding the Modern Stock Market and Makes Recommendations on How Regulators Should Intervene—If At All

New York, April 13, 2015—Controversy over many of the modern stock market’s practices—including high-frequency trading, electronic front-running, and the use of dark pools—is well-known, spawning private class action litigation, investigations by state and federal regulators, and a best-selling book by Michael Lewis.

But despite the flood of inquiries into and around trading techniques in the modern stock market, there has been relatively little serious legal and policy analysis concerning the issues that they raise. A new paper by Columbia professors fills this gap—offering a comprehensive framework for understanding the new stock market and answering basic questions: Who benefits from the controversial practices? Who is disadvantaged because of them? Should regulators and policy makers step in, and, if so, how should they prioritize the competing goals society looks to the stock market to fulfill (promoting fairness, enhancing the economy’s productive efficiency, allocating risk appropriately, fostering innovation, etc.)?
The paper, “The New Stock Market: Sense and Nonsense,” examines eight controversial practices, critiques current proposals in reaction to these practices, and offers recommendations for moving forward.  For example, although the authors conclude that high-frequency trading does not inherently result in unfairness in the market, they lean toward relatively low-cost reforms that would eliminate certain of high frequency traders’ current advantages, such as effectively receiving quote and transaction data ahead of other market participants.
Forthcoming in the Duke Law Journal, the paper is written by Columbia Law School Professor Merritt B. Fox, Columbia Business School Professor Lawrence R. Glosten, and Gabriel Rauterberg, a scholar with the Program in the Law and Economics of Capital Markets run by both schools. The authors are also involved in a larger project—the new Special Study of the Securities Markets—a comprehensive empirical study of the securities markets that would ultimately enable stakeholders to answer policy questions, improve regulatory structures, and anticipate new market developments.