Structure as an Independent Variable in Assessing Stock Market Failures
Abstract
Economists generally treat equity markets from the perspective of the transaction. Institutional economists have only recently begun to look at equity market structures. I argue that a greater focus on market structure is warranted and present a theory that uses structure as a diagnostic tool in assessing both the efficiency and integrity of the American financial system. The theory allows us to see that the current structure of the American securities market makes it impossible for brokers to determine the best available price in executing customers' orders, and, as a result, rents flow from retail customers to brokers, market makers, and specialists, regardless of whether they consciously seek them out. At the same time, the current structure creates opacity that facilitates opportunistic behavior. The structure of the market creates both pricing inefficiency and unfairness to retail customers.