Taking asymmetric information seriously: What modern regulators can learn from the structure of the London Stock Exchange in the early twentieth century

Sissoko, Carolyn

Abstract

© The Author(s) (2014). Key points • In the early years of the twentieth century the London Stock Exchange (LSE) had a unique structure that, this article argues, was well-designed to promote efficient and liquid securities markets because it strictly circumscribed opportunities for financial intermediaries to trade on the basis of information about the market and thereby mitigated the effects on London securities markets of the intermediaries' asymmetric information, which took the form of privileged access to market data. • Three characteristics of the LSE and the mechanisms by which they advanced economic efficiency and liquidity are examined in detail: the LSE had a simple market structure that all traders understood, it limited publication of market data, and it limited opportunities for financial intermediaries to profit from trading on the basis of their information about the market. • Regulation NMS, the primary regulation governing trade in modern US markets, by contrast, often has the effect of promoting trade on the basis of information about the market, and the European Union may be poised to put in place similar policies as it implements the new directive governing European markets, MiFID 2. • This article argues that modern regulators can learn from the LSE's example to consider the inefficiencies generated by the asymmetric information of financial intermediaries more carefully when designing regulations.

• Journal Article Type: Review
• Acceptance Date: Jul 21, 2014
• Online Publication Date: Nov 28, 2014
• Publication Date: Jan 1, 2015
• Deposit Date: Oct 17, 2019
• Journal: Capital Markets Law Journal
• Print ISSN: 1750-7219
• Electronic ISSN: 1750-7227
• Publisher: Oxford University Press (OUP)
• Peer Reviewed: Peer Reviewed
• Volume: 10
• Issue: 1
• Pages: 80-97
• DOI: https://doi.org/10.1093/cmlj/kmu034
• Public URL: https://uwe-repository.worktribe.com/output/3867959
• Publisher URL: https://doi.org/10.1093/cmlj/kmu034