One of the main objectives of securities regulation is to protect the fairness or integrity of the markets. However, despite the fact that this is a fundamental goal, there has been relatively little analysis of how we actually define when a market is fair or when it displays a high level of integrity.
This is problematic from a policy perspective as without further definition metrics cannot be developed to measure the effectiveness of securities regulators in achieving this objective. Furthermore, without such metrics, innovations which improve market efficiency, another key goal of securities regulation, are likely to be permitted even if the innovation in question actually detracts from the fairness or integrity of the market. This is because improvements in market efficiency are generally quantifiable, thereby creating momentum for them to be adopted while undermining indefinite assertions of market unfairness. For example, recently there has been controversy over whether securities regulators should intervene to prohibit high frequency traders being able to co-locate their computer servers with those of the exchanges. This practice has been demonstrated to have created measurable improvements in market efficiency, but at the same time appears to create an inequitable playing field because, as a result of such co-location, such traders receive market information a split second before other market participants.
In my article “What Exactly is Market Integrity? An Analysis of one of the Core Objectives of Securities Regulation” I attempt to redress this issue by exploring what is actually meant by market fairness and market integrity. Although some have dismissed these terms as norms of behaviour incapable of further definition, to the contrary I conclude that it is possible to extract some principles of general application. My analysis begins by a historical consideration of why market fairness was adopted as a central pillar of securities regulation in the US. From that time market fairness, market integrity, market confidence or some similarly worded objective has become accepted as a cornerstone of securities regulation by almost all securities regulators, as well as international organizations such as IOSCO and the G20. My paper then looks at how these terms seem to be understood and treated by the securities regulators and their governing legislation as well as academics in the legal, finance and behavioural finance disciplines. From this analysis I seek to demonstrate that market fairness and market integrity are in fact used interchangeably by securities regulators and thereby ought to be understood as one and the same. Furthermore I argue that central to these concepts are four key elements. First is the elimination of market abuse activities, that is, behaviours whereby one person takes advantage of their position to gain an unmerited advantage over another. This includes insider trading, market manipulation and front running. Second, these objectives of market integrity and fairness require non-discriminatory access to the market for all those wishing to participate. Third, to maintain market integrity and market fairness, transparent and accurate information about the price of securities must be available to all participants at the same time. Fourth, accurate information about issuers of securities must also be available to all participants at the same time. Finally I note that while some progress is being made to measure changes in the level of market abuse and thereby measure securities regulators’ performance in relation to this element of market integrity, to ensure that markets are fair and of high integrity a range of metrics should be developed for each of these four elements.
Janet Austin is an Associate Professor at the Faculty of Law, University of New Brunswick.