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Hastings Law Journal

Abstract

A dramatic shift in the economic and power structure of the securities industry is currently in progress. Traditionally, stock and futures exchanges have operated in the form of non-profit mutual or membership organizations. To the extent market power was not curtailed by competition or regulation, mutual governance gave specialist or market maker members of an exchange control of the price, quality and range of services produced by the exchange. Exchange profits were returned to broker and dealer members in the form of lower access fees or trading profits. Further, exchanges have long operated as self-regulatory organizations (SROs) with members contributing their time to governance and self-regulation to make exchanges more effective and more profitable. Selfregulation was enshrined in the federal securities laws and commodity laws, with oversight by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission.

The pressure to reduce trading execution costs and the demands for technological innovation are among the causes leading to the demutualization of exchanges. These developments are raising many market structure issues. These include regulation of electronic communication networks; market fragmentation; linkages; market information fees and other exchange revenues; the fair treatment of customer orders; and perhaps most importantly, the future of selfregulation. New competitive strategies by exchanges and their members, including demutualization, are raising serious conflicts of interest questions about self-regulation.

This Article will argue that the SEC is attempting to re-regulate market structure under a command and control model pursuant to the national market system provisions injected into the Securities Exchange Act of 1934 in 1975 at a time when the monopoly trading regime which led to the national market system mandate is breaking down. An interesting and relevant question this Article will pose is whether current trading technologies and the competition these technologies have engendered should lead to a reduction of SEC market regulation, rather than the increase in regulation envisioned by current SEC concept and rulemaking releases, so that competition rather than regulation can determine outcomes.

This Article will also inquire about the future of self-regulation and exchange governance in a world where stock and commodities exchanges are not mutual organizations. Although exchanges have long operated as SROs, there are serious questions as to whether they will be able to continue to do so after demutualization.

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