A New Approach to the Regulation of Trading Across Securities Markets

This paper proposes that the issuer of a security should have the exclusive right to determine in which markets its securities will be traded. This is in contrast to the current regime, where markets can decide to trade securities unilaterally, without the issuer's consent. The trading regime of a security affects its liquidity and consequently its value, and multimarket trading by some securities holders may produce negative externalities that harm securities holders taken as a group. Our proposed regime will shift the focus of inter-market competition from traders (which sometimes implies a "race to the bottom") to issuers. Since the issuer has an incentive to maximize the value of the traded securities, its choices will be consistent with those of securities holders taken as a group and with those of a hypothetical benevolent regulator. Under our proposed regime, markets will adopt and self-enforce rules and regulations that enhance liquidity and securities' values in order to attract issuers, thereby providing a market-based solution to regulation of trading markets. The paper also discusses the implementation of the rule for derivative securities, following a "fair use" approach