Latin American Capital Markets

GLOBALIZATION.TECHNOLOGY, AND REGULATION IN CAPITAL MARKETS 53The emergence of several trading systems has led to fragmentation, and liquidityhas become dispersed in small pools rather than consolidated in one place.This situation prompted the U.S. SEC to examine the issue in detail and provideguidelines. Under the new guidelines, ECNs are allowed to continue operating asbroker-dealers or apply to become an exchange.ECNs have several advantages in becoming an exchange, such as not beingregulated by a competitor (NASDAQ or the NYSE); not needing to reroute ordersfor best execution purposes; and being able to earn tape revenue by posting quotes.In addition to normal supervision of the market operator markets often require coordinationof regulatory activities for each ATS, surveillance, and establishment of minimumregulatory requirements. One possible response to this development is to consolidatethe SROs that exist now in U.S. markets and create a single, central SRO.Thisoption should remove the conflict of interest concerns and satisfy those opposed tothe NYSE's announced intention to keep its SRO in-house after it takes for-profit status.Although a central SRO might lose some of the nimbleness and expertise thatthe current SROs have, it still should be considered an alternative.Trading systems are a natural platform for cross-border trading.The technologyexists to make financial markets truly global and integrated.Technology can easilymake round-the-clock trading a reality. However in spite of all the progress, the regulatorybarriers to cross-border trading remain high. Commissioner Laura Unger ofthe U.S. SEC has pointed out, "The only real impediments to global market are regulatory,not technological. Specifically, what is lacking is an appropriate framework forthat market to work in." She also remarked that the U.S. SEC has ample authority andjurisdiction over the activities of foreign markets and broker-dealers in the UnitedStates, but the real issue is "to what extent the Commission should exercise that authority"in the global marketplace. 5Securities RegulationA strong legal and regulatory framework is essential for a well-functioning capital market.It is not sufficient to have laws and regulations—their enforcement is critical. Manyemerging markets have begun to set up an acceptable regulatory framework, but enforcementhas been lacking.This section discusses some approaches to globalization, focusingon the role of self-regulatory organizations in the regulation of capital markets.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub5 "The Global Marketplace, Ready or Not Here it Comes," speech by Laura Unger at the Third National SecuritiesTrading on the Internet Conference, New York, January 24,2000; http://ww.sec.gov/news/speeches/spch344.html.