An Informal Perspective on the Economics and Regulation of Securities Markets

This review uses an economic lens to offer perspectives on securities regulation. We discuss several motives for regulation and highlight some facets of regulatory conflict, competition, and coordination as well as the range of required securities market disclosures. We discuss the roles of economics and cost-benefit analysis in regulation under administrative law as well as “counting” and “line-drawing” exercises and the nature of the “unintended consequences” of regulation. Among the specific examples of securities regulation that the review highlights using economic principles are short-sale regulation (including the economic costs associated with short interest) and enforcement sanctions against corporations. We also note some of the successes (options backdating) and failures (Madoff and mutual fund market timing) of the securities regulator in identifying new enforcement challenges. This review concludes by highlighting the importance of regulatory uncertainty and time-consistent policies and applies this principle to several contexts related to the financial crisis.