A common debate among securities lawyers, regulators and professionals is whether and to what extent the internationalization of securities markets makes it difficult for state or national regulators to regulate effectively. This paper argues that an appropriate response to internationalization would be to devolve more regulatory authority to the exchanges themselves. It first notes that competing exchanges should have strong incentives to provide disclosure, antimanipulation and other investor protection rules that investors value. Policymakers in the 1930's rejected that view in favor of a belief that exchanges pursue exchange members' interests at the expense of investors' interests. The paper argues, however, that the evidence on which such beliefs were based is seriously deficient. The paper then considers the extent to which exchanges compete with one another and the extent to which their rules seek to curtail competition among their members. It argues that many facially anticompetitive exchange rules may represent attempts to prevent free riding on the exchange's prices and other assets by nonmembers. Moreover, it notes that governmental regulators have not instituted systematically more competitive rules than have exchanges. On balance, the paper argues, exchanges likely were -- and would again be -- superior markets regulators compared to governmental agencies.

Paul G. Mahoney, The Exchange as Regulator, 83 Virginia Law Review, 1453–1500 (1997).