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How Disruptive Innovation Necessitates Changes to Securities Regulation

While financial markets have endured the biggest impact of disruptive innovation, there’s still the absence of a rational explanation of the issue within both scholarly and policymaking circles, hence lack of effective regulations, says Professor Chris Brummer. One of the obstacles pertains to the diverse conduits through which new technology upsets market practices. Making matters worse, there’s a popular understanding that stable gatekeepers, for example clearing systems and broker-dealers form the backdrop for the operation of securities regulation. As such, effective regulation is required to cope with the realities the twenty-first century technology presents capital markets.

Today, securities regulation continues to experience more profound obstacles, as unprecedented scope of technological advancements continue to upset the market microstructure helping drive capital markets. Advanced computer resources and information technology has helped push to the sidelines important financial go-betweens, including investment banks and exchanges, paving the way for new market participants. If the undesired outcome caused by intermittent reorganization of capital raising procedures is also factored in, it’s clear how private stakeholders and venues boasting better technology are now hosting and mediating capital market liquidity, eroding the importance of public offerings.

Such developments now call for painstaking examination in the wake of the global cash crunch, and the momentum taken by new market technologies and disruptions soars breathtakingly. Today, the money raised in private venues surpasses public offerings courtesy of the fresh tools developed to match demand. Even the steadiest and most profitable of securities are easily exchanged via traditional venues as much as on the firms. These interferences consistently gain prominence with technological development, and together, they confound policymakers who are unable to react accordingly as they, too, try to find their voice in the latest financial markets ecology . Securities regulators have reacted to such disruptions by technology in either of the two ways, according to Chris Brummer: not to do anything or embrace laughable “concessions,” such as Twitter discovery and the nod given to tweets as a means to engage investors.

Developing a hypothetical groundwork for addressing disruptive innovation demands perceptions with the versatility to address and study diverse and changing market conditions in light of soaring regulatory mandates and policy targets. As a result, this demands shunning conventional assumptions concerning how regulatory policy is made to work.

Any highly effective securities regulation demands upgrades that accommodate the role of information technology (and virtual environments) in capital markets micro-ecosystems subject to extremely rapid change. The new securities regulation must account for the automated financial services, which have redefined market liquidity and changed its mode of operation. Private markets behind the development of a continuously-surging array of choices to facilitate security offerings and exchanges should also never be left out.

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