Regulation, Control, and Transparency

Abstract

Regulation is an essential component of any well-run financial system, and a robust system of rules and controls can add a degree of comfort to all stakeholders-investors, issuers, intermediaries, government authorities, and the public at large. In fact, national markets that feature a strong regulatory framework are generally better placed to attract and mobilize capital and ensure efficient funding and risk management than those lacking such controls. Of course, no regulatory regime is perfect, and even those that are well regarded suffer occasional mishaps-regulatory missteps or inadequacies tend to be revealed periodically, particularly during times of financial crisis. In the main, however, regulatory checks and balances may be considered effective and useful, and should be seen as essential to the smooth conduct of financial business. In this chapter we consider how the increasingly significant activity in the dark pool sector is, and should be, regulated. More specifically, we will consider financial regulation in the context of dark pools, the effects of regulatory changes on the development of dark pools, the optimal level of formal regulation (including reporting and transparency), and the potential opportunities for self-regulation. We noted in Chapter 1 that Regulations ATS and NMS and MiFID were designed, among other things, to create a competitive landscape where trades might be executed through various kinds of venues, rather than strictly through exchanges-subject, of course, to certain minimum standards to ensure fair treatment of clients and transparency on prices (if not necessarily on trading and execution). In fact, the regulations set forth at CHAPTER 7 163 E. Banks, Dark Pools