Stock exchanges and the new markets for securities laws

University of Chicago Law Review

Volumn 75, Issue 4, 2008, Pages 1435-1491

  Brummer, Chris ^a  

^a VANDERBILT UNIVERSITY   (United States)

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EID: 59549099811     PISSN: 00419494     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (268)

1. The notion that such a market is missing in securities regulation was popularized in Roberta Romano's seminal article. See generally Roberta Romano, Empowering Investors: A Market Approach to Securities Regulation, 107 Yale L J 2359 (1998) (advocating competitive federalism for securities regulation where states compete for investors by offering different sets of securities laws).
2. 15 USC §§ 77a-77bbbb (2000).
3. 15 USC §§ 78a-78mm (2000).
4. Committee on Capital Markets Regulation, Interim Report of the Committee on Capital Markets Regulation 2 (Nov 30, 2006), online at http://www.capmktsreg.org/pdfs/11.30Committee-Interim-ReportREV2.pdf (visited Aug 29, 2008) ("Interim Report") (stating that the US share of global IPOs declined from 48 percent in the 1990s to only 6 percent in 2005, and its share of global stock market activity dropped from 60 percent in 2000 to 50 percent in 2005).
5. See NYSE and Euronext in $20bn Merger, BBC News Online (June 2, 2006), online at http://news.bbc.co.uk/2/hi/business/5039412.stm (visited Aug 29, 2008) (reporting that the NYSE agreed to buy the pan-European Euronext exchange in response to competitive pressures).
6. See Nick Clark, Nasdaq Poised to Complete OMX Deal, The Independent (UK) 40 (Jan 3, 2008) (reporting that Nasdaq will take over the Nordic group OMX after it concedes a 19.9 percent stake in the combined company to Börse Dubai).
7. Sarbanes-Oxley Act of 2002, Pub Law No 107-204, 116 Stat 745, codified at 15 USC § 7201 et seq (2006).
8. See, for example, James D. Cox, Rethinking U.S. Securities Laws in the Shadow of International Regulatory Competition, 55 L & Contemp Probs 157, 157 (1992).
9. See also Eric J. Pan, Why the World No Longer Puts Its Stock in Us *9 (Cardozo Legal Studies Research Paper No 176, Dec 2006), online at http://papers.ssrn.com/abstract-id=951705 (visited Aug 29, 2008).
10. See Philip Stephens, The Financial Crisis Marks Out a New Geopolitical Order, Fin Times 9 (Asia ed, Oct 10,2008). Some commentators and leaders have furthermore argued that the United States will lose its superpower status in the world of international finance.
11. See Bertrand Benoit, German Minister Predicts US Will Lose Financial 'Superpower Status, ' Fin Times 1.
12. See also Andrew E. Kramer, Moscow Says U.S. Leadership Era Is Ending, NY Times A6 (Oct 3, 2008). As a result, regional financial centers have sought to displace now largely discredited US capital markets.
13. See Ariana Eunjung Cha, Financial Hubs See an Opening Up at the Top, Wash Post DOl (Oct 1, 2008). The degree of success they will have is, however, unclear.10 Notably, John Coffee has perceptively argued that cross-listings between exchanges may create pressures on regulators to provide credible, and often stringent, regulation.
14. See generally John C. Coffee, Jr., Racing towards the Top?: The Impact of Cross-listings and Stock Market Competition on International Corporate Governance, 102 Colum L Rev 1757, 1757 (2002). However, this account focuses primarily on how stricter US regulations may pressure foreign regulators to provide more stringent regulation, not the other way around.
15. See Larry E. Ribstein, Cross-listing and Regulatory Competition, 1 Rev L & Econ 97, 99 (2007) (noting that Coffee's model involves a "limited" form of regulatory competition in which a firm opts into a stricter regime in the United States). Stephen Choi and Andrew Guzman have also emphasized the impact of internationalization of capital markets; and although they do not discuss the structure of markets, they do note that with the interconnectivity of markets any policy change in one country has the potential to initiate transnational activity through a shift in investments across countries, including, presumably, the United States.
16. See Stephen J. Choi and Andrew T. Guzman, National Laws, International Money: Regulation in a Global Capital Market, 65 Fordham L Rev 1855, 1867 (1997). Their approach is, however, implicitly hypothetical as opposed to descriptive as the authors focus on an assessment of the value that regulatory competition would have if the "global securities market [were] free to determine for itself-through a market-based competitive process between regimes-the amount of diversity in regimes." Id at 1883. Finally, Amir Licht has focused on the mobility of issuers and investors in an attempt to theorize the lobbying strength of stock exchanges with regulators.
17. See generally Amir Licht, Stock Exchange Mobility, Unilateral Recognition, and the Privatization of Securities Regulation, 41 Va J Intl L 583 (2001) (arguing that the consolidation of global stock exchanges gave these exchanges unprecedented bargaining power vis-à-vis national security regulators). Yet Licht's study neither discusses the US context nor relates the new ownership and customer dynamics it does identify to the outstanding literature on regulatory competition.
18. See Stephen J. Choi and Andrew T. Guzman, Portable Reciprocity: Rethinking the International Reach of Securities Regulation, 71 S Cal L Rev 903, 937 (1998) (arguing for reforms granting issuers a choice as to laws governing securities transactions);
19. Romano, 107 Yale L J at 2401-02 (cited in note 1) (same).
20. See also James D. Cox, Regulatory Duopoly in U.S. Securities Markets, 99 Colum L Rev 1200, 1234 (1999) (questioning whether issuer choice is practicable based on skepticism that securities markets are "capable of making discrete judgments among issuers using different disclosure standards");
21. Merritt B. Fox, Retaining Mandatory Securities Disclosure: Why Issuer Choice Is Not Investor Empowerment, 85 Va L Rev 1335,1338-39 (1999) (arguing against issuer choice reforms because they would lead to significant underdisclosure).
22. Romano, 107 Yale L J at 2365 (cited in note 1). Those mandatory rules may, however, have notable and important exemptions. See note 63 for a discussion of Rule 144 A transactions.
23. See 15 USC § 77e (2000) (outlining § 5 of the Securities Act of 1933, the cornerstone of the regulation of primary transactions in the United States). Numerous exceptions do exist, however. See Thomas Lee Hazen, The Law of Securities Regulation § 4.1-4.36 at 177-294 (West 4th ed 2002).
24. Choi and Guzman, 71 S Cal L Rev at 909 (cited in note 11).
25. "Interstate commerce" is defined by the statute as implicating "trade or commerce in securities or any transportation or communication relating thereto" of one "state, territory or the District of Columbia" with another. 15 USC § 77b(a)(7). Issues deemed to be made outside the US are exempt from the statute's registration requirements. Because under the terms of the Act interstate commerce includes not only transportation "between any foreign country and any State, Territory, or the District of Columbia" but also communications via email, internet, or phone lines, virtually all sales involving US persons-as well as many foreign transactions-are covered by the Securities Act. Id.
26. USC § 781(a) (2000).
27. See 15 USC § 781. Notably, however, under Rule 12g3-2(b), such foreign issuers can enjoy an exemption from registration under this provision where a foreign listing is maintained and the US trading volume of its securities is no greater than 20 percent of the security's worldwide trading volume. See 17 CFR 240.12g3-2(b)(1)-(5)- See also Larry D. Soderquist, Understanding the Securities Laws § 9.3 at 9-3 (PLI 2004).
28. Frederick Tung, From Monopolists to Markets?: A Political Economy of Issuer Choices in International Securities Regulation, 2002 Wis L Rev 1363, 1371. Relief from registration is available only to issuers that have chosen not to use exchanges to sell securities. See 17 CFR § 240.12g3-2 (2007).
29. See also James D. Cox, Robert W. Hillman, and Donald C. Langevoort, Securities Regulation: Cases and Materials 552 (Aspen 5th ed 2006).
30. This is particularly the case in the United States under § 5 of the Securities Act and Rule 10b-5 of the Exchange Act. See Choi and Guzman, 71 S Cal L Rev at 909 (cited in note 11) (discussing the expansive extraterritorial reach of the Securities Act over any offerings that have a connection, no matter how remote, to the United States).
31. See generally Romano, 107 Yale L J at 2362-63 (cited in note 1) (noting that US investors are often harmed by the expansion of US securities jurisdiction because foreign firms often exclude them from takeover offers in order to avoid the application of US law); Choi and Guzman, 71 S Cal L Rev at 918 (cited in note 11) (maintaining that the strict territorial approach to jurisdiction is flawed because it binds together two separate aspects of value for investors-the capital and regulatory regimes of the country).
32. See Roberta Romano, The Need for Competition in International Securities Regulation, 2 Theor Inq in L 387, 390-96 (2001) (asserting that a market for regulatory regimes is superior to a monopolist regulator or "regulatory cartel" of internationally harmonized regimes).
33. See also Tung, 2002 Wis L Rev at 1379 (cited in note 18); Joel P. Trachtman, Regulatory Competition and Regulatory Jurisdiction, 3 J Intl Econ L 331, 334 (2000).
34. Tung, 2002 Wis L Rev at 1382 (cited in note 18) ("Under regulatory monopoly, regulators are too easily tempted to pursue their own bureaucratic aggrandizement without regard for the public interest.").
35. See id at 1383.
36. Although these reforms are the dominant models conceived of for liberalizing capital markets, it is worth noting that other reforms recently have been offered with regards to liberalizing the access of foreign broker-dealers to US investors. See, for example, SEC, Exemption of Certain Foreign Brokers or Dealers *13-14 (June 27, 2008), online at http://www.sec.gov/rules/ proposed/2008/34-58047.pdf (visited Aug 29, 2008). Such reforms, if adopted, would likely have dramatic implications for US investors and for investor protection concerns However, insofar as these regulations are limited to access by foreign brokers and dealers, they do little to enhance arbitrage opportunities for issuers or force lawmakers to internalize the costs of regulatory decisionmaking beyond the broker-dealer context.
37. Id at 1366. For a summary of issuer choice proposals, see id at 1379-86.
38. Some authors, including Andrew Guzman, have suggested that such options be available only for countries with comparable home-state regulations. See Guzman, 71 S CaI L Rev at 921 (cited in note 11) (explaining that "portable reciprocity allows issuers to choose any of the regimes of participating countries regardless of where the securities are issued") (emphasis added).
39. Perhaps the most outspoken proponent of exchange self-regulation, in one sense the exponent of exchange choice, is Paul Mahoney, who has argued for exchange self-regulation because of the "strong incentives to adopt rules that benefit investors." Paul Mahoney, The Exchange As Regulator, 83 Va L Rev 1453, 1457 (1997).
40. See Romano, 107 Yale L J at 2399-2401 (cited in note 1) (noting that although regulation by exchanges can solve the free-rider problem and save transaction costs, this type of regulation poses significant enforcement problems); Choi and Guzman, 71 S Cal L Rev at 945-47 (cited in note 11) (explaining that although exchange-based regulation provides the benefits of regulatory competition, these benefits are offset by many factors, including uncertainty and the difficulty of enforcement).
41. See Choi and Guzman, 71 S Cal L Rev at 945 (cited in note 11).
42. See id. See also Romano, 107 Yale L J at 2399 (cited in note 1).
43. See Choi and Guzman, 71 S Cal L Rev at 946-47 (cited in note 11). See also Romano, 107 Yale L J at 2399 (cited in note 1).
44. Choi and Guzman, 71 S Cal L Rev at 946 (cited in note 11). See also Romano, 107 Yale L J at 2399 (cited in note 1).
45. Increasingly, this term is referred to in more generic terms as "mutual recognition," especially by the regulatory community, insofar as it is more politically palatable to those concerned with regulatory arbitrage. See John C. Coffee, Jr., SEC Diplomacy, Natl L J 13 (June 16, 2008). Because, however, the initiative's requirement of a comparability assessment is somewhat inconsistent with the usual connotation of mutual recognition in the academic literature as not being conditional, this Article will continue to use the original appellation of "substituted compliance" in order to more precisely map its theoretical implications.
46. Ethiopis Tafara and Robert J. Peterson, A Blueprint for Cross-border Access to U.S. Investors: A New International Framework, 48 Harv Intl L J 31, 32 (2007) (arguing that their proposal "should greatly reduce the transaction costs investors currently pay when investing overseas, and allow the current situation of overlapping and duplicative registration and oversight requirements for certain stock exchanges and broker-dealers to end").
47. Substituted compliance would thus in theory comprise a four-step process. First, a foreign exchange would petition the SEC for registration. Second, the SEC and the foreign securities regulator that has primary responsibility for overseeing the petitioning exchange would undertake a comparability assessment. Because few jurisdictions would be comparable, this step would then likely include discussions of whether regulatory adjustments may be needed to bring the different regulatory systems into harmony. Third, the petitioning exchange would agree to service of process in the United States. Thus, substituted exchanges could effectively choose whether to operate under their own host-state laws or those of the United States. Finally, the SEC would give the public notice of the petition and seek public comment in support of or in opposition to the exemption. For a summary of this process, see id at 58-59.
48. Id at 32.
49. See Howell E. Jackson, Andreas M. Fleckner, and Mark Gurevich, Foreign Trading Screens in the United States *1 (Harvard Law School Discussion Paper No 549, June 2006) (noting that trading screens allow investors to trade on an exchange without being physically present at the exchange or even in the same jurisdiction as the exchange). In this way, substituted compliance would function similarly to the Multi-Jurisdictional Disclosure System (MJDS). The MJDS permits Canadian issuers to sell securities in the United States using Canadian prospectuses and US issuers to sell securities in Canada using US prospectuses.
50. See Stephen J. Nelson, U.S.-Canadian Mutual Recognition, Traders Mag (June 5,2008), online at http://www.tradersmagazine.com/news/101133-1.html (visited Aug 29, 2008). It also permits Canadian issuers to provide annual and semiannual disclosure to US investors using Canadian forms, rather than Forms 10-K, 10-Q, and 8-K that are usually required of US firms. Id. However, substituted compliance would likely go a step further. First, no registration would be required by issuers whose shares are traded on foreign exchanges. Furthermore, substituted compliance would likely allow some kinds of securities to be traded crossborder that the MJDS would not permit. It also, unlike the MJDS, applies to foreign broker-dealers, thereby liberalizing their access to US investors, though it would impose duties on countries to participate in crossborder enforcement initiatives
51. See Choi and Guzman, 71 S Cal L Rev at 923 (cited in note 11).
52. See id.
53. Id.
54. See Romano, 107 Yale L J at 2363 (cited in note 1).
55. Id at 2383. For much of the second half of the nineteenth century, states had imposed a variety of requirements both tying corporations to state boundaries and extracting high rents and taxes from out-of-state firms. As a result, however, firms were increasingly impeded from engaging in cross-border activities, in effect slowing the pace of industrialization. The internal affairs doctrine largely removed such barriers. See Larry E. Ribstein and Erin Ann O'Hara, Corporations and the Market for Law, 2008 U Ill L Rev 661, 661.
56. Tung, 2002 Wis L Rev at 1390 (cited in note 18).
57. Id.
58. See Mark J. Roe, Delaware's Competition, 117 Harv L Rev 588, 645 (2003).
59. But see Marcel Kahan and Ehud Kamar, The Myth of State Competition in Corporate Law, 55 Stan L Rev 679, 686 (2002) (arguing that Delaware nearly stands alone in its legislative and judicial efforts to attract incorporations).
60. See Romano, 107 Yale L J at 2365 (cited in note 1).
61. Choi and Guzman, 71 S Cal L Rev at 923-24 (cited in note 11).
62. Choi and Guzman, for one, predict segmentation, as does Coffee. See Choi and Guzman, 65 Fordham L Rev at 1881 (cited in note 10) (arguing that "competition among countries to tailor their regimes to specific types of issuers . . . promotes] the likelihood of a separating equilibrium outcome"); Coffee, 102 Colum L Rev at 1767 (cited in note 10) (arguing that bonding mechanisms hold more predictive power than a market segmentation approach because the barriers that once segmented markets have largely eroded, thus reducing the need for issuers to enter distant markets to access trapped pools of liquidity). Romano also predicts regulatory homogenization. See Romano, 107 Yale L J at 2425 n 216 (cited in note 1).
63. See Choi and Guzman, 71 S Cal L Rev at 923 (cited in note 11).
64. See also Romano, 107 Yale L J at 2393 (cited in note 1).
65. See William W. Bratton and Joseph A. McCahery, The New Economics of Jurisdictional Competition: Devolutionary Federalism in a Second-best World, 86 Georgetown L J 201, 211 (1997).
66. See, for example, Cox, 99 Colum L Rev 1234 (cited in note 11) (questioning whether differences in regulatory regimes can be effectively priced by investors).
67. See, for example, Fox, 85 Va L Rev at 1410 (cited in note 11) (doubting whether managers of firms are incentivized to choose optimal regulation).
68. Some authors, like Frederick Tung, additionally question whether, given the incentives of political actors, issuer choice is ever likely to come about. See Tung, 2002 Wis L Rev at 1368 (cited in note 18). This intervention avoids, however, larger normative claims.
69. See note 10 for a discussion of scholars who have studied regulatory competition and the limitations to their approaches.
70. Joel Trachtman has addressed this issue perhaps most directly and has perceptively noted that calls for regulatory competition "are really arguments for increased regulatory competition by virtue of adjustment of choice of law rules." Trachtman, 3 J Intl Econ L at 334 (cited in note 21). His work, though not providing an institutional account of regulatory competition, notes that there are increasing avenues available for "technical mobility" although such mobility does not always result in jurisdictional mobility. See id at 336-37.
71. See Tung, 2002 Wis L Rev at 1394 (cited in note 18).
72. Id at 1367.
73. Id.
74. Id. See also Trachtman, 3 J Intl Econ L at 334 (cited in note 21).
75. See generally Charles M. Tiebout, A Pure Theory of Local Expenditures, 64 J Pol Econ 416 (1956) (concluding that the revenue-expenditure patterns of local government are shaped by the preferences of mobile consumer-voters who shop between various jurisdictions).
76. See Trachtman, 3 J Intl Econ L at 337 (cited in note 21).
77. See id at 334 (noting that one must examine the "geographic and product scope of the monopoly" to determine the contestability of regulatory markets).
78. See Robert B. Thompson, Corporate Federalism in the Administrative State: The SECs Discretion to Move the Line between the State and Federal Realms of Corporate Governance, 82 Notre Dame L Rev 1143, 1144-45, 1164 (2007) (noting that the "SEC was able to accomplish indirectly via listing standards what it had not been able to do directly by rule" and that listing standards have become the primary vehicle by which the SEC skirts the federalism-based limits on its authority and shapes corporate governance). This is not to say, however, that exchanges are the only instruments of corporate finance and that other innovations do not have a significant impact on a regulator's provision of securities laws. Certainly, a company need not necessarily sell its securities on an exchange in order to raise capital. A company can, for instance, sell securities like debt "over-the- counter" (OTC), "off-exchange," or enter into loans with banks. Moreover, not all companies sell their securities to the public; instead, many choose to sell securities on 144A "private" markets on which only institutional investors participate. Yet these alternative means of financing are not as directly tied to the strength of US securities regulators as stock exchanges and do not initiate extrajurisdictional regulatory competition. OTC securities are only subject to the stringent reporting requirements of the 1934 Exchange Act or the liability regimes of the 1933 Securities Act if they have significant assets and a stable of US investors. And bank loans and private placements escape these rules altogether. Thus if a foreign firm chooses to undertake one of these means of financing in the United States, US securities regulators will not necessarily enjoy enhanced regulatory power, even though the volume of transactions in the United States may increase. Instead, these alternative means of financing contribute to what can be viewed as an intrajurisdictional competition between the more liquid, public exchanges and illiquid, lightly regulated securities.
79. This assumes, of course, that states do not modify their rules of regulatory jurisdiction to attach to domestic persons or institutions. See Trachtman, 3 J Intl Econ L at 336 (cited in note 21).
80. Coffee, 102 Colum L Rev at 1776-77 (cited in note 10).
81. Id (giving examples of Israeli companies choosing the Nasdaq for their IPO over their home market in order raise capital from a small group of US institutional investors).
82. Andreas M. Fleckner, Stock Exchanges at the Crossroads, 74 Fordham L Rev 2541, 2546 (2006).
83. Id.69 The range of services offered by exchanges is growing. A few exchanges may also provide for the clearing and settlement, or "paperwork," accompanying the sale of securities. They may also derive additional revenue from providing quote and trade data concerning a security to other venues. See id at 2547. See also Ruben Lee, The Future of Securities Exchanges, in Robert E. Litan and Richard Herring, eds, Brookings-Wharton Papers on Financial Services 2002 1, 2-3 (Brookings 2002) (arguing that dominant exchanges will enjoy revenue from the sale of trade data that may come to even eclipse transaction fees).
84. Fleckner, 74 Fordham L Rev at 2546 (cited in note 67) (stating that one of the critical functions of a stock exchange is to "provide liquidity").
85. Jonathan Macey and Hideki Kanda, The Stock Exchange as a Firm: The Emergence of Close Substitutes for the New York and Tokyo Stock Exchanges, 75 Cornell L Rev 1007, 1012 (1990) (explaining that liquidity requires that the price of the stock be "rationally related to the market's existing estimation of the firm's earnings prospects" whereas in an illiquid market, the price can be biased downwards by artificial conditions, such as the lack of a willing buyer).
86. Id (stating that competition in a liquid market functions as a price-setting mechanism that performs the valuation process and therefore reduces information costs for market participants).
87. Id.
88. In economic terms, this discount is the "illiquidity premium" impounded into the price of a security. Zvi Bodie, Alex Kane, and Alan J. Marcus, Investments 280 (McGraw-Hill 5th ed 2002).
89. The only way increased issuances will be avoidable is when the expected return on the illiquid asset is higher. Id.
90. Macey and Kanda, 75 Cornell L Rev at 1013 (cited in note 71).
91. Fleckner, 74 Fordham L Rev at 2547 (cited in note 67).
92. Id at 2581.
93. Id (noting that the stock exchange's constituents, such as executives of member firms, specialists, floor brokers, lessor members, listed companies, institutional investors, and individual investors, establish its rules and regulate it accordingly).
94. 15 USC § 78e.
95. 15 USC § 78f(b)(1).
96. Id.
97. 15 USC § 78s(h)(1).
98. Jonathan R. Macey and Maureen O'Hara, From Markets to Venues: Securities Regulation in an Evolving World, 58 Stan L Rev 563, 599 (2005). See also Fleckner, 74 Fordham L Rev at 2593 (cited in note 67) (noting that with demutualization "each expense will be scrutinized in terms of whether it will help increase profits" and that this scrutiny may include regulatory expenses);
99. Robert E. Prentice, The Inevitability of a Strong SEC, 91 Cornell L Rev 775, 795-97 (2006) (arguing that reputational restraints on exchanges will not provide adequate incentives for exchanges to police their members). Still, the issue as to whether such oversight is practical remains contested. A.C. Pritchard has eloquently argued that antifraud enforcement should remain under the control of exchanges, as interest groups operating on exchanges have high incentives to enforce vigorously prohibitions against fraud on the market.
100. See A.C. Pritchard, Markets as Monitors: A Proposal to Replace Class Actions with Exchanges as Securities Fraud Enforcers, 85 Va L Rev 925, 929 (1999).
101. Fleckner, 74 Fordham L Rev at 2593 (cited in note 67).
102. Id.
103. Coffee, 102 Colum L Rev at 1794-96 (cited in note 10).
104. See Mahoney, 83 Va L Rev at 1462-63 (cited in note 27).
105. This view constitutes the so-called "bonding hypothesis" of securities regulation. See Coffee, 102 Colum L Rev at 1780-81 (cited in note 10). See also Rafael la Porta, et al, Legal Determinants of External Finance, 52 J Fin 1131, 1136-44 (1997). Indeed, securities markets may not be able to expand to their full potential in the absence of a mandatory legal regime protecting minority shareholder rights.
106. John C. Coffee, Jr., The Rise of Dispersed Ownership: The Roles of Law and the State in the Separation of Ownership and Control, 111 Yale L J 1, 64 (2001) (arguing that this view explains why strong securities regulation is enacted after markets have become established). Nevertheless, even in the absence of highly developed law, equity markets can, and have, still developed. There are a variety of institutional accounts as to why this is the case.
107. See, for example, Katharina Pistor and Chenggang Xu, Governing Stock Markets in Transition Economies: Lessons from China, 7 Am L & Econ Rev 184, 206 (2005) (arguing that administrative governance can substitute for formal legal governance). Usually, however, securities markets ultimately encounter shocks that result in a loss of investor confidence that legal institutions help buffer against. Coffee, 111 Yale L J at 65,69-71 (using recent transitional economies in Europe and Asia as examples).
108. Coffee, 102 Colum L Rev at 1763 (cited in note 10) (arguing that this benefit is why European firms that can choose between various legal disclosure regimes voluntarily comply with the strictest one).
109. Presumably, investors would be willing to pay the costs of additional disclosure where the risk of fraud is decreased. In economic terms, regulation would be efficient where for every $1 spent or invested in regulation, the expected cost of fraud would be reduced by x > $1 and thus appropriately priced into the value of the security.
110. This apparently was the case with regard to at least some provisions of the SarbanesOxley legislation. See Kate Litvak, Sarbanes-Oxley and the Cross-listing Premium, 105 Mich L Rev 1857, 1875-95 (2007).
111. See text accompanying notes 80-85.
112. See text accompanying notes 86-88.
113. See Robert B. Ahdieh, Making Markets: Network Effects and the Role of Law in the Creation of Strong Securities Markets, 76 S Cal L Rev 277, 280-81 (2003).
114. See id at 307-08.
115. Economists refer to this phenomenon as order flow externality. See, for example, Larry Harris, Trading & Exchanges: Market Microstructure for Practitioners 526 (Oxford 2003) (describing how without regulatory intervention this causes markets to consolidate).
116. Id at 143-44.
117. With experience, some traders could develop strategies that would allow them to anticipate periods when liquidity is high and trade more often and in larger sizes during such periods. They also could develop skills at reading momentum in the market and timing trades accordingly. See Puneet Handa, Robert A. Schwartz, and Ashish Tiwari, The Economic Value of a Trading Floor: Evidence from the American Stock Exchange, 77 J Bus 331, 332 (2004) (arguing microstructure economists have not paid enough attention to the ways a trading floor contributes to additional liquidity). Traders could also better execute trades in ways that would allow them to hide informed trades. Such activities are often guesswork and may depend on established relationships with friends or allies.
118. See Harris, Trading & Exchanges at 529 (cited in note 97) (noting that traders may reveal preferences or orders to reward friends or exchange favors with traders with whom they must deal).
119. Hans Stoll, Electronic Trading in Stock Markets, 20 J Econ Perspectives 153, 154 (2006).
120. Marshall E. Blume, Jeremy J. Siegel, and Dan Rottenberg, Revolution on Wall Street: The Rise and Decline of the New York Stock Exchange 41 (W.W. Norton 1993).
121. On many call auction markets, specialists act as market makers. Id at 38. As such, specialists determine the opening price of a security at the beginning of the trading day. Id at 43. Orders arriving before the open are batched and executed at a single opening price. Id. The specialist sets the opening price depending on the number of orders in his book, his own willingness to participate, and his ability to find other traders at the opening. Id. Once trading starts, all new incoming market orders are placed into a "book" on the floor in which limit orders constitute the bid and ask prices in an auction market. See Roger D. Huang and Hans R. Stoll, Tick Size, Bid-Ask Spreads, and Market Structure, 36 J Fin and Quant Anal 503, 505 (2001) (presenting evidence that spreads are lower in auction markets where the limit orders are known than in dealer markets where dealers keep their limit orders secret until execution);
122. Blume, Siegel, and Rottenberg, Revolution on Wall Street at 39 (cited in note 101) (describing how orders pass through the book at the NYSE).
123. Verbal bids and offers are also made by brokers operating on the floor. Blume, Siegel, and Rottenberg, Revolution on Wall Street at 39 (cited in note 101). In this way, investors trade directly with other investors, ensuring a competitive market for securities. Some floor specialists furthermore are charged with "maintaining a fair and orderly market" in the stock in which they specialize.
124. NYSE Group, NYSE Rules, Rule 104.10 (2008), online at http://rules.nyse.com/N2YSE (visited Aug 29, 2008). In this capacity, they provide both immedia- cy and price stability, two key elements of liquidity. As providers of immediacy, specialists stand ready to buy and sell where there are no offers or counteroffers for securities. Specialists are also required to transact where transaction-to-transaction price changes would be unacceptably large, such as when the book is sparse, or if large orders exert undue pressure on the market. Id. The former services are not free; as compensation, specialists sell to buyers at higher ask prices and buy from sellers at lower bid prices than what would ordinarily be the case in a thicker market.
125. See Blume, Siegel, and Rottenberg, Revolution on Wall Street at 40 (cited in note 101). Meanwhile, the latter services entail obligations by specialists to buy when the market is moving up and to sell when the market is plummeting. In countering market trends, these transactions, though not profitable, help stabilize thin markets.
126. See Joel Kurtzman, How the Markets Really Work 36 (Crown Business 2002).
127. As a result, investors demand a higher liquidity premium. See Kumar Venkataraman, Automated versus Floor Trading, 56 J Fin 1145, 1452 (2001).
128. Helen Kirwan-Taylor, Hard Labour, Evening Star Mag (London) 34 (Mar 2, 2007).
129. Klaus Weber and Gerald F. Davis, The Global Spread of Stock Exchanges, 1980-1998 *2 (William Davidson Institute Working Paper No 341, Nov 2000), online at http://www.wdi.umich.edu/ files/Publications/WorkingPapers/ wp341.pdf (visited Aug 29, 2008).
130. This was, until recently, particularly the case in the United States. See Robert B. Ahdieh, Law's Signal: A Cueing Theory of Law in Market Transition, 77 S Cal L Rev 215, 215 (2004) (observing that US exchanges, and particularly the NYSE, seemed to resist technological modernization).
131. Roger D. Huang, Price Discovery by ECNs and Nasdaq Market Makers *2 (unpublished manuscript, Mar 29, 2000), online at http://www2.owen. vanderbilt.edu/fmrc/pdf/wp2000-02.pdf (visited Aug 29, 2008).
132. Id.
133. Stoll, 20 J Econ Perspectives at 161 (cited in note 100).
134. Id at 160.
135. See Roger D. Huang, The Quality of ECN and Nasdaq Market Maker Quotes, 57 J Fin 1285, 1286-87 (2002) (examining whether Nasdaq market makers or alternative trading systems have higher quote quality).
136. Lawrence R. Glosten, Is the Electronic Limit Order Book
137. Huang, 57 J Fin at 1290 (cited in note 111) (observing that this system leads to smaller quote spreads than Nasdaq's electronic system with market makers).
138. Eric Benhamou and Thomas Serval, On the Competition between ECN's, Stock Markets and Market Makers *15 (University of Toulouse FMG Working Paper No 0345, Dec 1999), available online at http://ssrn.com/abstract= 223872 (visited Aug 29, 2008);
139. Eric Benhamou and Tho- mas Serval, On the Competition between ECNs, Stock Markets and Market Makers, in Kurt Bauknecht, Sanjay Kumar Madria, and Günther Pernul, eds, Electronic Commerce and Web Technologies: First International Conference, EC-Web 2000 291, 306 (Springer 2000).
140. See Stoll, 20 J Econ Perspectives at 161 (cited in note 100) (describing how ECNs get around this difficulty by paying for limit orders or convincing dealers to make a market in the ECN book).
141. See Ben Steverman, While For-profit NYSE Prospers, Floor Traders Fight for Survival, Investor's Bus Daily Al (Feb 2, 2007). This system has proven especially popular among traders, as most trades are now executed electronically on the NYSE. See id.
142. See NYSE Group, NYSE Hybrid Market FAQ (2006), online at http://www.nyse.com/pdfs/ hybridfaqs.pdf (visited Aug 29, 2008) (explaining that the specialists provide "opportunitpes] for price improvement" while the electronic exchange offers "sub-second, automated trade execution").
143. Harris, Trading and Exchanges at 546 (cited in note 97).
144. Id at 546-47 (noting that electronic trading is also advantageous because traders can sit next to their phones, talk with colleagues, and consult data systems that support their trading). Investors worldwide can receive instantaneous quotations on dozens of currencies, as well as trading data on gold, oil commodities, shipping, stocks, and bonds. Moreover, information is neither site-specific nor held by a select few brokerages and trading professionals-but instead increasingly disseminated throughout the industry through television and the internet.
145. Id at 547 (noting, however, that floor traders can negotiate trade sizes and other details more rapidly than electronic traders can).
146. E*Trade Financial, Capital Markets FAQs (2008), online at https://capitalmarket-etrade.com/ e/t/capitalmarkets/faqs (visited Aug 29, 2008) (acknowledging that market volatility and volume may still delay execution of electronic orders).
147. Stoll, 20 J Econ Perspectives at 161 (cited in note 100) (listing this as one of five advantages ECNs have over traditional markets).
148. See Richard Martin, Business at Light Speed: Wall Street's Attempt to Shave Milliseconds Off Transactions Pushes the Limits of Computer Science, Information Week 42 (Apr 23,2007).
149. With a thicker market, bid-ask spreads are reduced, as well as volatility and uncertainty concerning the price of a security. See Siwa Msangi and Mark Rosegrant, Agriculture and the Environment: Linkages, Trade-offs and Opportunities, 19 Georgetown Intl Envir L Rev 699,708 (2007) (claiming the relative thickness of the grain market is responsible for its decreased volatility compared to other commodities).
150. See Jun Muranaga and Tokiko Shimizu, Market Microstructure and Market Liquidity 3 (Imes Discussion Paper Series No 99-E-14, May 1999), online at http://www.imes.boj.or.jp/ edps99/99-E-14.pdf (visited Aug 29, 2008).
151. As an example of the kinds of needs of many floors, consider the fact that the Chicago Board of Trade trading floor is as large as a Boeing 747 hanger and wired with 27,000 miles of telephone, computer, and power lines. Craig Pirrong, Electronic Exchanges Are Inevitable and Beneficial, 22 Regulation 20,22 (1999), online at http://www.cato.org/pubs/regulation/regv22n4/ pirrong.pdf (visited Aug 29, 2008).
152. See Jeff Brown, Algorithmic Trading: Why Now?, X Elec Trading J 30, 31 (2005), online at http://fixglobal.com/back-issues/Q6/AMERICAS/ Algorithmic%20trading-Q6.pdf (visited Aug 29, 2008) ("Data storage costs have declined to the point where market data, which can run to tens-even hundreds-of gigabytes daily, may be stored and analyzed inexpensively. Vendor and brokerage systems can now consume and respond to real-time data in intelligent and sophisticated ways.").
153. See Tafara and Peterson, 48 Harv Intl L J at 34 (cited in note 34).
154. Lee, The Future of Exchanges at *2-3 (cited in note 69).
155. Benhamou and Serval, On the Competition at 294 (cited in note 114).
156. Rightly or wrongly, the market interprets moves by sophisticated, or "informed," traders as a signal as to the desirability of a security and charges a premium for counterparty executions. As a result, institutional investors commonly employ a series of floor brokers to quietly execute parts of one large order in order to provide some anonymity, although such maneuvers are often recognized by other traders. See id.
157. See Huang, Price Discovery at *2 (cited in note 107).
158. See Benhamou and Serval, On the Competition at 293 (cited in note 114) (noting that "technology can lower the fixed costs [of building a new network] and allow an oligopolistic market structure to emerge").
159. See Iftekhar Hassan, Markuu Malkamäki, and Heiko Schmiedel, Technology, Automation, and Productivity of Stock Exchanges: International Evidence, 27 J Bank & Fm 1743, 1747 (2003).
160. See Commissioner Laura S. Unger, Speech by SEC Commissioner: Trading Floors versus Computer Networks (Jan 29,2001), online at http://www.sec.gov/news/speech/spch462.htm (visited Aug 29, 2008).
161. See Hans R. Stoll, The Stock Exchange Specialist System: An Economic Analysis 44 (NYU Stern 1989).
162. This may particularly be the case in developing countries with large per capita savings such as China.
163. Marco Pagano, Ailsa A. Röell, and Josef Zechner, The Geography of Equity Listing: Why Do Companies List Abroad?, 57 J Fin 2651, 2655 & n 3 (2002) (claiming that firms can only use their own stock as currency for acquiring targets when the firm and its target are listed on the same exchange).
164. This effect has been perhaps best witnessed in Europe. For example, when the London Stock Exchange adopted electronic trading, it greatly improved its efficiency and within month same to dominate equity trading in Europe in the 1980s. Coffee, 102 Colum L Rev at 1769 (cited in note 10). To reverse the erosion of their domestic securities business caused by competition from London, competitor exchanges in continental Europe hastened to introduce their own automation on a full or partial basis within five years of this move by the LSE. See Norman Poser, Automation of Securities Markets and the European Community's Proposed Investment Services Directive, 55 L & Contemp Probs 29, 33 (1992).
165. The LSE in particular has become one of the fastest stock exchanges in the world through a series of successive electronic upgrades culminating in the exchange's Electronic Trading Service in 1997. See London Stock Exchange Goes Electronic, At Last, Intl Herald Trib Money Report 21 (Oct 18, 1997) (discussing the LSE's transition from a market maker to an electronic ordermatching system);
166. HP Press Release, London Stock Exchange Becomes World's Fastest with HP and Microsoft Technology (July 13, 2006), online at http://www.hp.com/ hpinfo/newsroom/press/ 2006/060712xa.html (visited Aug 29, 2008) (touting the advantages of a fast exchange for algorithmic trading). It has also leveraged remote accessing to create one of the largest investor bases in the world, with its trading data disseminated and displayed on more than 107,000 terminals in more than one hundred countries.
167. Microsoft, Windows Server 2003 Customer Solution Case Study: London Stock Exchange Cuts Information Dissemination Time from 30 to 2 Milliseconds *3 (Oct 2006), online at http://download.microsoft.com/download/3/a/0/ 3a0b6465-a87c-45c0-92c8-4cfd8b4415b6/ LSE-WinServ03-Final.doc (visited Aug 29, 2008) (quoting LSE employees as stating that increased performance increases the attractiveness of the exchange). This global reach and speed of information has helped the exchange internationalize its listings and increase its market share. In the past three years alone, London has increased its share of the global IPO market from 5 percent to almost 25 percent. Committee on Capital Markets Regulation, Interim Report at 3 (cited in note 4) (observing that "there are many considerations that interact in complex ways when companies decide where to raise capital"). The nineteen US companies that entered the LSE in 2005 raised a total of $2.13 billion, and by mid-2006, London boasted a total of thirty-seven listed US companies.
168. Thomas Frostberg, AIM Grabbing Nasdaq Business: U.S. Companies Find New Investors on London Market, San Fran Chron D1 (Apr 28, 2006).
169. See Committee on Capital Markets Regulation, Interim Report at 3 (cited in note 4) ("In the first nine months of 2006, 11 US companies chose to list in London instead of the United States, raising approximately $800 million."). These companies made the choice despite a possible obligation still to register under the Exchange Act, suggesting important market considerations, likely tied to liquidity, informing firms' decisions to list.Similarly, the Hong Kong Stock Exchange surged past New York to become the world's secondmost popular place - after London - for companies floating new stock listings.
170. Hong Kong Sprints past New York for IPOs, MSNBC (Dec 24,2006), online at http://www.msnbai-sn.com/id/16348428 (visited Aug 29, 2008) (listing the rise of regional markets, tough new US accounting rules, and proximity to mainland China as factors in Hong Kong's success). Its popularity lies, in part, in the softer (less costly) listing standards it imposes on firms seeking to raise capital there. Id. It also arises, however, from the widespread adoption in 1993 of the Automatic Order Matching and Execution System (AMS), a trading system that rivals the LSE's Stock Exchange Electronic Trading Service (SETS) in terms of system technology and capability.
171. Ron Yiu-wah Ho, Roger Strange, and Jenifer Piesse, The Structural and Institutional Features of the Hong Kong Stock Market: Implications for Asset Pricing 20-21 (King's College Management Centre Research Paper No 027, Apr 2004), online at http://www.kcl.ac.uk/content/1/c6/01/15/45/paper27.pdf (visited Aug 29, 2008). This technologjca! sophistication is a necessary predicate for the exchange's ability to attract mainland Chinese listings that otherwise may have listed in London or even the United States.
172. See World Bourses Scramble for China Action, Asia Times Online (July 18, 2006), online at http://www.atimes.com/atimcs/China-Business/HG18Cb02. html (visited Aug 29, 2008). Because of these advances, the London and Hong Kong exchanges offer increasingly credible alternatives to the US market.
173. See Steven M. Davidoff, Regulating Listings in a Global Market, 86 NC L Rev 89, 112 (2007).
174. Committee on Capital Markets Regulation, The Competitive Position of the US Equity Market * 1 (Dec 4, 2007), online at http://www. capmktsreg.org/pdfs/The-Competitive-Position-of-the-US-Public-Equity-Market.pdf (visited Aug 29, 2008).
175. Id.
176. Id.
177. Committee on Capital Markets Regulation, Amid Plunging IPO Activity in 2008, CCMR Finds that U.S. Public Equity Market Competitiveness Continues Its Decline * 1 (Sept 3, 2008), online at http://www.capmktsreg.org/press/ 9-3-08-CCMR-Q2-competitiveness-update.pdf (visited Oct 20, 2008).
178. Id.
179. Committee on Capital Markets Regulation, The Competitive Position at *16 (cited in note 141).
180. Id.
181. Frostberg, AIM Grabbing Nasdaq Business: U.S. Companies Find New Investors on London Market, San Fran Chron at D1 (cited in note 140).
182. See Ernst & Young, Globalization: Global IPO Trends Report 2007 8 (2007), available online at http//www.ey.com/Global/assets.nsf/ IntemationaySGM-IIX)-Trends2007/$füe/Global-IPOTrends-2007.pdf (visited Aug 29, 2008) (noting that because "[c]apital is global today ... the choice of exchange comes down to location, regulation, cost and where it feels most natural to be listed").
183. This has had a significant impact on US exchanges, particularly in light of Sarbanes-Oxley. See Beth Carney, Foreign Outfits Rue Sarbanes-Oxley, Bus Wk Online (Dec 15, 2004), online at http://www.businessweek.com/bwdaily/ dnflash/dec2004/nf20041215-9306-db016.htm (visited Aug 29, 2008) (reporting that many foreign companies, in the face of increased costs associated with Sarbanes-Oxley, were planning to delist from US-based exchanges, particularly as "U.S.-based institutional investors become more willing to buy shares on European markets");
184. Marshall McKnight, Pulling Up Their SOX, NJBiz (June 28, 2004), online at http:/www.njbiz.com/article.asp?aID=98928986. 6635706.783159.9249798. 6079763.594&aID2=60234 (visited Aug 29, 2008) (predicting that, as a result of increased regulation by Sarbanes-Oxley, many smaller companies will either choose to remain private or decide to list their shares on the LSE rather than bear the expense of compliance).
185. See, for example, Ernst & Young, Globalization at 16 (cited in note 149).
186. See Jonathan R. Macey and Geoffrey P. Miller, Toward an Interest-group Theory of Delaware Corporate Law, 65 Tex L Rev 469, 506 (1987).
187. See id.
188. See Ruben Lee, The Future of Securities Exchanges at *2-3 (cited in note 69) (observing that transaction fees are the largest source of revenue for most exchanges but this fact may change as the marginal cost of each trade diminishes through technological improvements).
189. Ribstein, 1 Rev L & Econ at 121 (cited in note 10) (noting that any increase in the volume of securities transactions directly benefit specialists on exchanges and market makers who manage trading of shares).
190. The risks of unemployment are greater now than ever before due to the fact that exchanges are not member-owned but publicly traded. See Macey and O'Hara, 58 Stan L Rev at 574 (cited in note 84) (noting that the "market for control creates incentives for managers to further shareholder interests by threatening managers with job loss" when performance is poor).
191. These indirect beneficiaries are identical to those in the corporate context. See Macey and Miller, 65 Tex L Rev at 493-94 (cited in note 151).
192. I speak here of individuals, not firms. On the firm level, it is entirely possible to adapt to changes in the market through the creation of affiliates or by merging with competitors.
193. See Macey and Miller, 65 Tex L Rev at 486 (cited in note 151). Many individuals likely also face a variety of frictions to mobility, like family circumstances or language ability.
194. See Ribstein, 1 Rev L & Econ at 129 (cited in note 10) (arguing that "exempting foreign stocks may undercut the rationale for mandatory disclosure"). The policy implication is that there are at least some strong "benefits to requiring all firms in a market to be subject to the same disclosure rules." Indeed, the benefits to uniformity "when combined with the benefits of mandatory disclosure for the foreign firms, [ ] bolster[] the case against a foreign firm exemption from mandatory disclosure." Id at 130.
195. See Jeffrey H. Birnbaum, A Quiet Revolution in Business Lobbying, Wash Post A01 (Feb 5, 2005) (noting the Chamber of Commerce has gone as far as suing the SEC over securities regulations).
196. Id.
197. See, for example, Allison Dabbs Garrett, Themes and Variations: The Convergence of Corporate Governance Practices in Major World Markets, 32 Denv J Intl L & Policy 147, 174 (2004);
198. Ruth O. Kuras, Harmonization of Securities Regulation Standards between Canada and the US, 81 U Detroit L Rev 465, 472 (2004).
199. See also Commission on the Regulation of US Capital Markets in the 21st Century, About the Commission: Mission, online at http://www. capitalmarketscommission.com/portal/ capmarkets/commission/default (visited Aug 29, 2008) (discussing town halls organized by the US Chamber of Commerce to decide on a reform agenda that would ensure the competitiveness of the US capital markets).
200. In the United States, for example, the securities industry directly accounts for one in every nineteen jobs. Michael R. Bloomberg and Charles E. Schumer, Sustaining New York's and the US' Global Financial Services Leadership 36 (2007), online at http://www.schumer.senate.gov/ SchumerWeb-te/pressroom/special-reports/2007/NY-REPORT%20-FTNAL.pdf (visited Aug 29, 2008) (highlighting a study showing that each securities job also creates two additional jobs in other industries).
201. See also Alan G. Hevesi and Kenneth R Bleiwas, The Securities Industry in New York City X (Oct 2006), available online at http://ww.osc.state.ny. us/osdc/rpt9-2007.pdf (visited Aug 29, 2008).
202. In New York State, for example, a tax is imposed on the sale or transfer of, among other things, shares of stock, certificates of stock, and certificates of rights to stock. NY Tax Law § 270(2) (Consol 2007) (imposing a tax of 2.5 cents on each share transferred). Although the effects of the stock transfer tax were phased out through a series of rebates, the tax is maintained in order to meet certain funding requirements of the Municipal Assistance Corporation. See id at § 80-a (allowing a full rebate on the tax paid to the extent funds are available in the stock transfer incentive fund).
203. Specifically, in the United States, individuals and corporations pay tax on distributions from corporations in which they hold shares of stock. See IRC §301 (2007).
204. See IRC § 1(h).
205. The critical issue in many jurisdictions will be where the person holding the shares resides and where the corporation resides. And even in the event where the state prevents financial engineering from allowing individuals to escape taxation, the state will still likely lose tax revenues on the actual transaction.
206. See Chris Brummer, Ties that Bind?: Regionalism, Commercial Treaties, and the Future of Global Economic Integration, 60 Vand L Rev 1349, 1400-05 (2007) (noting how more powerful countries, including wealthier ones, are able to defect from international agreements and force compliance from smaller states).
207. See Pan, Why the World No Longer Puts Its Stock in Us at *11-12 (cited in note 8) (arguing that several foreign countries "have adopted the best parts of the US legal regime-diminishing many of the advantages of coming to the United States").
208. See Floyd Norris, Reasons Some Firms Left the U.S., NY Tunes C1 (Augt 8, 2008) (arguing that Sarbanes-Oxley created benefits for issuers and helped to restore investor confidence following the financial scandals of 2001).
209. See Pan, Why the World No Longer Puts Its Stock in Us at *11-12 (cited in note 8).
210. See Rule 12(h)-6, 17 CFR § 240.12(h)-6 (2007).
211. Of course, not all regulators will face the same domestic lobbying pressures. Though countries may have their own incentives to increase the size of their financial centers (see below), the degree of domestic pressure any regulator will face will depend in large measure on the size of its domestic financial center. Countries, in other words, with small financial centers, will face less pressure from financial services professionals since they will be smaller in number and likely less wealthy. Regulators will furthermore face less domestic pressure to expand or protect capital markets where countries have less open political processes. Thus a country like China will likely face less domestic opposition to its failure to create a vibrant capital market than a country like the United States or the United Kingdom.
212. See Pan, Why the World No Longer Puts Its Stock in Us at *11 (cited in note 8); Tafara and Peterson, 48 Harv Intl L J at 50 (cited in note 34) (arguing that although IFRS standards can be an "admittedly complicated process, [it is] one far less onerous than having the financial statements be prepared entirely using U.S. GAAP").
213. See John Coffee, The Future as History: The Prospects for Global Convergence in Corporate Governance and Its Implications, 93 Nw U L Rev 641, 702 (noting that the SEC has stead-fastly resisted any reciprocal prospectus system under which foreign issuers could issue securities in the US based on their home country's disclosure standards).
214. See text accompanying notes 34-37.
215. See generally Sarah Johnson, Goodbye GAAP, CFO Mag (Apr 1, 2008) online at http://www.cfo.com/article.cfm/10919122 (visited Aug 29, 2008).
216. See Louis Lowenstein, Financial Transparency and Corporate Governance: You Manage What You Measure, 96 Colum L Rev 1335, 1338 (1996).
217. In such circumstances, applying different standards to foreign and domestic firms makes interfirm comparisons more difficult. Ribstein, 1 Rev L & Econ at 130 (cited in note 10). See also Paul Diaconu, Sr., Impact of Globalization on International Accounting Harmonization *4 (unpublished manuscript, Jan 18, 2007), available online at http://papers.ssrn. com/abstract-id=958478 (visited Aug 29, 2008).
218. See Coffee, 93 Nw U L Rev at 672 (cited in note 175).
219. The latter kind of harmonization, though rare, is not without precedent. Indeed, citing technological advances, the SEC proposed alongside the availability of electronic submissions a shortened filing deadline for annual reports by foreign private issuers in a way that brought them more closely in line with US issuers.
220. See Part II.
221. This is perhaps best reflected in the NYSE's many tie-ups with exchanges around the world like the Tokyo Stock Exchange and National Stock Exchange, the largest stock exchange in India. See, for example, Lauren Hilgers, Closely Watched Partnership: NYSE, Tokyo Exchange Already Tight, Sec Industry News (Feb 5, 2007), available on Westlaw at 2007 WLNR 2200669 (noting the intended alliance between the two exchanges, but acknowledging that NYSE is unable to purchase shares in Tokyo Stock Exchange as the exchange does not plan to go public until 2009);
222. NYSE Euronext News Release, NYSE Group to Purchase 5% Equity Interest in National Stock Exchange, India's Largest Financial Marketplace (Jan 10, 2007), online at http://www.nyse.com/press/1168342114215. html (visited Aug 29, 2008).
223. This is not unusual.
224. See Ian Domowitz and Benn Steil, Automation, Trading Costs, and the Structure of the Securities Trading Industry, in Robert E. Litan and Anthony M. Santomero, eds, Brookings-Wharton Papers on Financial Services 1999 33, 44 (Brookings 1999) (noting that the Chicago Mercantile Exchange has adopted the same technology as that of the Marché à Terme International de France, France's primary futures exchange).
225. Id.
226. The scalability of electronic trading furthermore makes the operational costs of merger more attractive, and more profitable activity results as more trades can be facilitated on the same platform with no marginal costs.
227. The Hong Kong Stock Exchange, for example, has strategic alliances with both the LSE and the NYSE.
228. This was partially the case in the NYSE-Euronext merger, through which the NYSE sought to not only acquire a European outpost but also to diversify into derivatives. See Ivy Schmerken, CME and CBOT to Merge Derivatives Exchanges, Wall St & Tech: Blog (Oct 18, 2006), online at http://walltreetandtech.corn/blog/archives/2006/10/cme-and-cbot-to.html (visited Aug 29, 2008).
229. Such considerations may be of increasing importance in the wake of the credit crisis as derivatives like credit default swaps are increasingly traded on exchanges. See Erik Sirri, Testimony Concerning Credit Default Swaps (Oct 15, 2008) (testimony of Director, SEC Division of Trading and Markets, before the House Committee on Agriculture), available online at http://www.sec.gov/news/ testimony/2008/tsl01508ers.htm (visited Oct 20, 2008).
230. This assumes, of course, that there are no adverse tax consequences penalizing (or making more advantageous) overseas operations.
231. Roberta S. Karmel, The Once and Future New York Stock Exchange: The Regulation of Global Exchanges, I Brooklyn J Corp, Fin & Comm L 355, 357 (2007).
232. In the NYSE-Euronext merger, clearing and settlement technology was a critical motive for merging the two exchanges. Eliminating or reducing paperwork for investors can, experts believe, potentially reduce costs for investors by as much as 18 percent. Battle of the Bourses, Economist 66 (May 27, 2006).
233. See Karmel, 1 Brooklyn J Corp, Fin & Comm L at 378 (cited in note 191) (using the exchanges that comprise Euronext as an example of where this has occurred).
234. Id.
235. See Battle of the Bourses, Economist at 66 (cited in note 192) (noting that many hedge funds in particular "use automated algorithmic trading methods that spew out vast quantities of electronic limit orders designed to exploit trading opportunities that may exist for only a fraction of a second").
236. Id.
237. See NYSE-Euronext Merger Gains Momentum, Voice of America (May 24, 2006), online at http://ww.voanews.com/english/archive/2006-05/2006-05-24- voa28.cfm?CFID=148349576&CFtoken=58307589 (visited Aug 29, 2008).
238. see generally Richard Carpenter, What's Next for Euronext?, IR Mag (Sep 2002), online at http://www.thecrossbordergroup.com/pages/824/ September+2002.stm?article-id==9915 (visited Aug 29, 2008).
239. See NYSE and Euronext in $20bn Merger (cited in note 5).
240. Stock Exchanges: Coming Together, Economist 14, 14-15 (Mar 18, 2006) (identifying the growth of electronic trading, the end of exchanges as clubs, and the demands of investors who rely on complex crossborder strategies as the catalysts for the wave of mergers).
241. See Qatar, Dubai Gain Control of London Stock Exchange, Herald Sun (Sept 24, 2007), online at http://www.news.com.au/heraldsun/story/0,21985, 22470317-5005961,00.html (visited Aug 29, 2008).
242. See Part I.B.
243. This would be, and indeed is, the case even where firms cross-list.
244. This is the case even though investors in other jurisdictions are able to invest unsolicited.
245. See text accompanying notes 193-91.
246. See Ian Domowitz, Electronic Derivatives Exchanges: Implicit Mergers, Network Externalities, and Standardization, 35 Q Rev Econ & Fin 163, 169 (1995) ("If the liquidity effect is large enough, traders will... be willing to pay for it.").
247. The literature suggests that such efforts could be quite effective given the inordinate bargaining power of exchanges. See Licht, 41 Va J Intl L at 615-18 (cited in note 10) (arguing that stock exchanges have powerful leverage to the extent to which they operate like wholesale agents of issuer regulatory preferences).
248. See Battle of the Bourses, Economist at 67 (cited in note 192).
249. See E. Waide Warner, "Mutual Recognition" and Cross-border Financial Services in the European Community, 55 L & Contemp Probs 7, 9, 13 (1992).
250. Chinese markets will, for example, have important liquidity advantages over many foreign exchanges when it comes to listing Chinese firms because Chinese investors may know the firms better than international investors and because shares can be traded simultaneously with the dissemination of information about a Chinese firm's financial well-being.
251. See Warner, 55 L & Contemp Probs at 22 n 90 (cited in note 209).
252. This thinking is advanced not only in the issuer choice literature but is also supported by many scholars in the broader literature on exchange regulation. See, for example, Mahoney, 83 Va L Rev at 1454-55 (cited in note 27).
253. Issuers, too, may have bundled preferences not entirely based on the law. They may choose law based on similar network effects. Simply put, if other issuers are using a particular legal regime, they may opt for it in order to increase transparency and decrease costs for analysts and investment banks and therefore increase the attractiveness of the security. Still, their preferences should be purer than those of exchanges since issuers face a wider range possible benefits.
254. International expansion is, at least currently, a highly attractive organizational option. The basis of such activity involves harnessing liquidity and deepening capital markets. See Part III. A.
255. See Tafara and Peterson, 48 Harv Intl L J at 32 (cited in note 34) (proposing waiver of SEC registration requirements when foreign exchanges comply with substantially comparable regulatory regimes that share "extensive enforcement- and supervisory-related information" with the SEC).
256. Though the advocates of substituted compliance view regulatory competition as a positive phenomenon, they themselves readily acknowledge the pressure substituted compliance imposes on nonparticipants. See, for example, id at 56-57 (noting that substituted compliance would "permit the U.S. and other countries with similar regulatory philosophies to leverage their regulatory strength" by restricting access to the crossborder market to substantially compliant jurisdictions). They view the "size of the U.S. capital market" as a major factor in encouraging "other regimes to adopt high regulatory standards." Id at 56.
257. Indeed, the quality of jurisdictions may vary widely. See Howell E. Jackson, Commentary, A System of Selective Compliance, 48 Harv Intl L J 105, 114-15 (2007).
258. See Stephen J. Choi, Promoting Issuer Choice in Securities Regulation, 41 Va J Intl L 815, 821-22 (2001) (arguing regulators will have an incentive to compete in an issuer choice framework because the per-issuer cost of enforcement and regulation decreases as the number of issuers in the framework increases, which makes the framework more attractive to future issuers); Mahoney, 83 Va L Rev at 1459 (cited in note 27) (arguing that exchanges, as regulators, should choose optimal regulatory rules when ample alternative regimes are available).
259. See Choi, 41 Va J Intl L at 821-22 (cited in note 218); Mahoney, 83 Va L Rev at 1458-59 (cited in note 27).
260. Indeed, empirical evidence already suggests that firms often make disclosures based on what similarly situated firms have done before them. See Stephen J. Choi, Law, Finance, and Path Dependence: Developing Strong Securities Markets, 80 Tex L Rev 1657, 1720-22 (2002) (discussing a study of European firms that indicated firms chose higher levels of disclosure than the law mandated because it was the norm). For example, if a steel concern in Germany makes public a detailed account of its political relationship with the governments of countries from which it receives supplies, subsequent steel producers may feel required to do the same in order to receive the same level of financing. This path dependency in the disclosure context would likely emerge in the choice-of-law context as well.
261. Guzman and Choi downplay this possibility and suggest that large institutional investors will find it cost-efficient to utilize legal intermediaries to learn the laws of different countries, though small investors may not. See Choi and Guzman, 71 S Cal L Rev at 934-38 (cited in note 11) (arguing that small capital markets are also likely to adopt only incremental changes from the laws of large capital markets, thus significantly reducing any learning costs). This claim, however, has not been tested empirically.
262. See, for example, Anita Indira Anand and Peter Charles Klein, Inefficiency and Path Dependency in Canada's Securities Regulatory System: Towards a Reform Agenda, 42 Can Bus L J 41, 55 (2005) (asserting that the development of jurisprudence and historical constraints have rendered Canadian securities law path-dependent on an inefficient system). Investors may, as a result, choose to specialize in only a handful of regulatory regimes.
263. This is obviously a very crude example and it is quite likely that either liquidity or regulation could have a negative impact on share price. The numbers are used here, however, for illustrative purposes only.
264. Kenyan regulators may, however, still find powerful incentives to compete for a smaller swath of the market, namely local firms that may not qualify for listing overseas or those firms that may nonetheless find financing easier in Kenya given their local name recognition and connections to the domestic business community.
265. Obviously, the above hypothetical reflects a favorable race to the top envisioned by supporters of regulatory competition. However, one can envision other kinds of bidding, discussed at length in the literature, where in fact the nature of the bidding will be made in terms of the benefits managers can secure by opting into a particular kind of regime. The theoretical point, however, is not that the normative outcome of competition is preferable, but instead that regulators are incentivized to compete - even where markets are not at complete parity in terms of liquidity.
266. See Romano, 107 Yale L J at 2426-27 (cited in note 1).
267. As an initial investigation of the issue, see generally Chris Brummer, Corporate Law Preemption in an Age of Global Capital Markets, 81 S Cal L Rev (forthcoming 2008).
268. See, for example, Howell E. Jackson and Eric J. Pan, Regulatory Competition in International Securities Markets: Evidence from Europe in 1999 - Part 1, 56 ABA Bus Law 653, 661-62 (2001).