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The New Stock Market: Law, Economics, and Policy
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 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.
408 pages, Hardcover
Published January 8, 2019
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March 2, 2021
This book deals with highly topical issues in the market structure debate, such as liquidity provisioning by HFT, dark-pools and maker-taker or PFOF arrangements.
It tackles those topics taking a very specific approach. The authors claim they rely on information economics, though what is meant by that is not very clear to me. Information economics and market microstructure economics is now a highly technical area of microeconomics/game theory but they mostly seem to be relying on earlier, simpler and more approachable formulations of it, such as the seminal Harris' book, which they cite a number of times. Basically, they apply a negative selection perspective to liquidity provision (this is neither new nor controversial) and this informs the rest of their analysis, which is trifurcated along wealth-distribution, fairness and efficiency.
It this analysis that I find most frustrating because sometimes it feels superficial (for example when considering the trade off between price accuracy and liquidity, when the authors decree in favor of one of these, witthout being explicit about how you measure these two things agains each other) or when, seemingly, the same types of transactions are once considered to be loss making and other times not. Unfortunately I feel that I lack the tools to engage with those issues on the level I would want to. From the review by CFA Institute I gather that this kind of analysis is somewhat confusing for more adept people as well. In other words, I'm not sure the yardsticks the authors have chosen for assessing different phenomena in the book, and how they are applied, are comprehensive and best fit for analyzing them.
This book is also somewhat uneven, some parts more theoretical, some purely descriptive, which gives you a feel of it being put together from different pieces of research which maybe was not meant to be presented together. At no point this turns into incoherence but it sometimes make you wonder who the intended audience is.
I feel like anyone interested in the market structure debate would benefit from reading the last, descriptive part together with the part on economics of market making part. However, anyone interested in those topics can also learn about them in a more accessible or perhaps general (i.e. not tied to the idiosyncratic framing of authors) way from other sources. The book surely gives you a framework to thing about recent changes in equity markets, I'm just unsure whether it's the best one there is.
It tackles those topics taking a very specific approach. The authors claim they rely on information economics, though what is meant by that is not very clear to me. Information economics and market microstructure economics is now a highly technical area of microeconomics/game theory but they mostly seem to be relying on earlier, simpler and more approachable formulations of it, such as the seminal Harris' book, which they cite a number of times. Basically, they apply a negative selection perspective to liquidity provision (this is neither new nor controversial) and this informs the rest of their analysis, which is trifurcated along wealth-distribution, fairness and efficiency.
It this analysis that I find most frustrating because sometimes it feels superficial (for example when considering the trade off between price accuracy and liquidity, when the authors decree in favor of one of these, witthout being explicit about how you measure these two things agains each other) or when, seemingly, the same types of transactions are once considered to be loss making and other times not. Unfortunately I feel that I lack the tools to engage with those issues on the level I would want to. From the review by CFA Institute I gather that this kind of analysis is somewhat confusing for more adept people as well. In other words, I'm not sure the yardsticks the authors have chosen for assessing different phenomena in the book, and how they are applied, are comprehensive and best fit for analyzing them.
This book is also somewhat uneven, some parts more theoretical, some purely descriptive, which gives you a feel of it being put together from different pieces of research which maybe was not meant to be presented together. At no point this turns into incoherence but it sometimes make you wonder who the intended audience is.
I feel like anyone interested in the market structure debate would benefit from reading the last, descriptive part together with the part on economics of market making part. However, anyone interested in those topics can also learn about them in a more accessible or perhaps general (i.e. not tied to the idiosyncratic framing of authors) way from other sources. The book surely gives you a framework to thing about recent changes in equity markets, I'm just unsure whether it's the best one there is.
Displaying 1 of 1 review