"Regulation and Innovation: Comparing U.S. and European Equity Trading Markets"

In the last two years, the major jurisdictions for equity trading, the U.S. and the E.U., introduced significant reforms in their market structure regulation, following diametrically opposite approaches. While the E.U. effort is deregulatory and decentralized, aiming to facilitate competition among marketplaces and enhance investors’ choices, the U.S. regulation limits competition in a critical respect: price. To understand this divergence and predict likely effects on the underlying markets, this paper compares the previous regimes in the two jurisdictions and their outcomes. It illustrates that European market participants in a fiercely competitive regulatory environment revolutionized their trading services and organizational structure. In contrast, innovation in the U.S. has been modest, largely due to the long-standing dominance of the New York Stock Exchange, a dominance reinforced by SEC rules limiting competition on price. As recent reforms strengthen the earlier choices of each jurisdiction, the paper argues that the US policy of limiting price competition extends past failures into future policies. The conclusions of this paper illuminate debates on the optimal degree of regulatory intervention and theories of allocation of regulatory authority.