Giving a talk in Warwick Business School, Tuesday 20 May
May 14, 2014
If you’re into SSF and happen to be in Warwick University next Tuesday…
Seminar at the Information Systems Management group
Speaker: Professor Yuval Millo, University of Leicester
Where do Electronic Markets Come From? Regulation and The Transformation of Financial Exchanges
Date: Tuesday 20 May 2014
Venue: M2, MBA Teaching Centre
Michael Castelle1, Yuval Millo2, Daniel Beunza3
1. University of Chicago
2. University of Leicester School of Management (Corresponding author)
3. London School of Economics
The recent history of the stock exchange as an institution is portrayed frequently as that of precipitous decline and destabilization. The widely accepted reason for this decline is the automation of trading of financial assets and contracts. In this paper we aim to add a theoretical and empirical basis to this broad explanatory narrative, and suggest that traditional exchanges were not simply marginalized by competition from electronic trading platforms, but that a more sophisticated historical and sociotechnical process was at play. Our research indicates that interactions between the regulatory discourses and technological materialities led to a reconfiguration of the nature of competition among U.S. exchanges; to an increased fragmentation of market share; and, ultimately, to a dramatic change in the nature of financial exchanges. This paper focuses its analysis on the Securities and Exchange Commission’s Regulation of Exchanges and Alternative Trading Systems (Regulation ATS) —which threatened, disrupted, and formally redefined the ontology of the exchange.
Exchanges compete across various dimensions: most importantly, trading facilities and new listings. However, our findings show that Reg ATS contributed to a dissolution of the distinction between exchanges and broker-dealers, which used to be the customers of exchanges. The latter—via the technological affordances of electronic communication and transaction-processing database systems but also through the increased (and SEC-mandated) standardization of trade reporting, quotes, and orders—began to pragmatically provide functionality previously unique to exchange trading floors.
This radical equivalence between “broker” and “exchange” cannot be attributed only to technological progress or the intentional outcome of regulatory action, but its history is the fulcrum of the transformation in the nature of financial exchange.