May 3, 2005
SEC and SROs
A political compromise with the national stock exchanges in 1934 created our current SRO (Self Regulatory Organization) system of trading market regulation. Each major trading exchange would regulate and discipline its own members, subject to oversight by the newly created Securities and Exchange Commission. Over the years SEC oversight grew incrementially in power (through Congressional statute or SEC rule) with each new trading market scandal. The SEC, on investigation of the scandal, would decide that the SRO was not viligent enough and needed a kick in the pants and more SEC supervision.
The current proposal of the NYSE to become a publicly-traded corporation (it is now a New York not-for-profit corporation) has led to calls for the seperation of the SRO function of the NYSE from its trading operations. This is not be an easy planning task should the SEC continue to favor some form of the SRO system. Abolishing the SROs altogether would be the simplist and more efficient form of regulating the new NYSE.
SROS have never worked as well as they claim to have worked. I find the argument strange that a for-profit exchange can not be its own SRO but that a not-for-profit corporation can when the not-for-profit corporation is run for the exclusive benefit of members seeking huge profits. It is nonsense. The same reasons that cause one to worry about a for-profit exchange as an SRO should have caused the same worries about the current NYSE as an SRO. The NYSE has never been and will never be a public interest organization.
In any event, the time is ripe and the whole SRO system ought to be abandoned. The SEC ought to regulate the exchanges directly, without the use on a professional trade orgainization as an intermediary. Imagine the cries of derision if Congress in the 1890s had let the owners of railroads set up a professional organization to regulate the railroad industry, overseen losely by the ICC. What makes trading markets so special?
May 3, 2005 | Permalink
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