This debate is a good example of Stigler's theory of economic capture. In this case, because the New York Stock Exchange (NYSE) has a benefit in increasing the number of trades happening in its platforms, we can confidently expect that they welcome regulatory interference in their space; or "worse" that they are actively seeking to be regulated as a way of increasing their market share. Meanwhile, independent-platform owners like Citi or JPMorgan are left to argue the apparently absurd argument that the SEC has been hijacked by powerful interests of some New York industrials. Our studies this semester point towards Citi et al being right; however, they also point to the fact that if the SEC has indeed been captured, NYSE's chances of getting the regulation passed are very high - which could be foreseen in January, when the SEC overruled its advisory committee when it voted 13-3 against this piece of regulation.
Monday, November 17, 2014
Stock Market Capture
The Securities and Exchange Commission's plan to increase trading volume for many U.S. small cap stocks can be seen two ways: A) something that "will encourage market makers to buy and sell shares by making each transaction potentially more profitable" and consequently incentivize more initial public offerings (IPOs); or B) "a stealth attempt to hurt brokers that run private trading systems that compete with the likes of the New York Stock Exchange." Obviously the SEC and Congress lawmakers side with option A in saying that new regulation is here for the benefit of consumers/small companies/society.
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After reading the article, it is clear that the benefactor of the Securities and Exchange Commission’s plan to increasing trading volume will be the New York Stock Exchange. I also believe that this new regulation will be passed because the owner of New York Stock Exchange possess more resources to spend in order to exert political pressure. This can be demonstrated with Becker’s argument about political influence. According to his influence funtion, political influence is greatly determined by which of the interest groups is able to apply higher pressure affecting political outcomes. The main determinant factors of these exerted pressures are the total resources spent by the people in an interest group. Applying his logic to this article, SEC’s new regulation will be more likely to pass if the benefactor New York Stock Exchange posses more resources. On the contrary, this regulation will be unlikely to pass if the opponent interest group includes members of independent platforms like Citigroup and JPMorgan possess more resources. The amount of resources of a company is usually determined by the size of market capitalization. New York Stock Exchange has the largest market capitalization than any other company. As such, it is possible that NYSE possess way more economic resources than members of opponent interest group to exert political influence. From Becker’s point of view, the large amounts of economic resources that the benefactor group posses will the new SEC regulation to be passed.
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