Keynote address by Dr. Subir Gokarn, Deputy Governor, Reserve Bank of India at the International Options Market Association, World Federation of Exchanges Annual Conference organised by the National Stock Exchange at Mumbai on May 4, 2011
Once again, the world’s equity markets are witnessing a period of dramatic change. Driven by advances in technology, changes in regulatory and competition policy, and the evolution of exchanges from mutual to publicly traded, for-profit entities, we are seeing the simultaneous consolidation of exchange markets and the concurrent proliferation of alternative trading venues. A spectrum of market operators, traders and investors has raised concerns about these developments and their implications for transparency and market fragmentation.
The business of financial intermediation – bringing capital to new endeavours, securing a well-regulated set of investment choices for savers, and enabling risks to be laid off or assumed – has been one of the world’s great growth industries. Regulated securities and futures’ exchanges have stood at the apex of the burgeoning business of financial intermediation. Were we not so used to it, we would be startled that a single type of business could be so prominent that its street address would serve as short-hand for the entire economy, and an index of its prices a key barometer of economic outlook. Wall Street, Threadneedle Street, Hang Sen, Sensex, CAC40: these and other such names have become accepted barometers for economic wellbeing or otherwise.
This paper canvasses the trends in self-regulation and the role of self-regulation in securities markets in different parts of the world. It describes the conditions in which self-regulation might be an effective element of securities markets regulation, particularly in emerging markets. The paper also discusses important issues for the effective operation of SROs, including corporate governance, managing conflicts of interest, and regulatory oversight by government authorities.
If anyone in Chicago in the 1960s had suggested that within a few decades the city would establish itself as an international financial centre, they would have been laughed out of town. To be sure, Chicago was to some degree a centre of money management, a banking hub for the US Midwest. It was also a town whose biggest markets had international significance: the settlement prices for corn, oats, wheat and soybean futures at the Chicago Board of Trade, the world’s biggest futures market, set prices for the whole world. But agricultural commodities were simply not part of mainstream finance. Wall Street was largely indifferent to futures trading, which was looked at as an exclusive domain of farmers and industrial food producers.
The events of May 6, 2010 and the subsequent investigation, analysis, and reporting by the staffs of the Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission (“SEC” and together with the CFTC, the “Commissions”) have highlighted many important policy and practice issues in today’s securities and futures market environment. In this Summary Report, the CFTC-SEC Joint Advisory Committee on Emerging Regulatory Issues focuses on recommendations targeted at the most important and pervasive issues affecting investors and the markets, rather than attempting to address all of the topics that have been raised in the course of our work.
Think back to 2009 when high frequency trading (HFT) first became a topic of interest. At the time very little research existed on the issue -- essentially all we knew was that high frequency traders were fast and technologically sophisticated. They spent heavily to achieve low-latency, by purchasing co-located servers and by employing programmers who could optimize data analysis techniques. Since then researchers, including myself, have started studying HFT in greater depth.
My work specifically looks at the activities and impact of HFT on U.S. equity markets, and my research has uncovered several key characteristics of high frequency traders.
A recent article in Traders Magazine states that the amount of "internalization" in US markets has increased from 20% to 30% in the past year. As pointed out in the Traders Magazine article, the definition of internalization has expanded to include dark pool and upstairs trades and is also known as off-exchange reporting. In addition, a recent Wall Street Journal article reports that markets are becoming increasingly fragmented, with NYSE market share declining to 37% from 70% two years earlier. The question then is, given the increased fragmentation in US markets, what impact has the increase in off-exchange reporting had on market quality - if any? This study seeks to provide answers to that question.
This chapter considers the stock markets that have emerged during the transition from centrally planned to market economies. The transition occurred over the last 20 years and covered a wide geographical area spreading from Central and Eastern Europe (CEE) through Central Asia to China and Vietnam. A complete description of the different paths of transition in each individual country would be too voluminous for this forum. Instead, this chapter concentrates on the common features and most important differences in the development of stock markets in the more than 30 countries that underwent transition.
The following analysis identifies the most important factors that contributed to the success or failure of individual stock markets that were re-established from a fresh start in the early 1990s.
Given that the WFE promotes high standards for markets, growth of the regulated exchange model, and international coordination among regulators, CME Group would like to draw your attention to a recent proposal by the U.S. Commodity Futures Trading Commission (CFTC) that could limit competition by “Foreign Boards of Trade” (FBOTs) in U.S. derivatives markets and undermine global coordination among regulators.