Brummer on Disruptive Technology and Securities Regulation

Chris Brummer has posted Disruptive Technology and Securities Regulation on SSRN with the following abstract:

Nowhere has disruptive technology had a more profound impact than in financial services — and yet nowhere more do academics and policymakers lack a coherent theory of the phenomenon, much less a coherent set of regulatory prescriptions. Part of the challenge lies in the varied channels through which innovation upends market practices. Problems also lurk in the popular assumption that securities regulation operates against the backdrop of stable market gatekeepers like exchanges, broker dealers and clearing systems — a fact scenario increasingly out of sync in 21st century capital markets.

This Article explains how technological innovation not only “disrupts” capital markets — but also the exercise of regulatory supervision over securities issuances and trading. It argues that an array of technological innovations in speed, interconnectivity and processing power are facilitating what can be understood as the disintermediation of the traditional gatekeepers that regulatory authorities have relied on (and regulated) since the 1930s for investor protection and market integrity. Effective securities regulation will thus require understanding the new market ecosystem, and 20th century administrative processes will have to be upgraded to account for a computerized (and often virtual) market microstructure that is subject to accelerating change. To provide context, the paper examines two basic categories of disruptive innovation: 1) the automated financial services that are transforming the meaning and operation of market liquidity and 2) the private markets — specifically, the dark pools, ECNs, 144A trading platforms, and crowdfunding websites — that are creating an ever-expanding array of alternatives for both securities issuances and trading.