Is information in capital markets a commodity or a public resource? If it is a resource, how much information should be distributed to the public, at what cost to the producer, and on what terms?
These are the sorts of questions that Chasing the Tape: Information Law and Policy in Capital Markets (MIT Press, 2015), by Onnig Dombalagian, tries to answer.
The author argues that the existing responses to these questions are being challenged by new technologies used in financial markets. Foremost amongst these are the proliferation of electronic trading networks and high frequency trading strategies.
Another, more fundamental, challenge comes from the field of behavioural economics.
Even if information were efficiently distributed, would it be rationally used by participants? Moreover, how much are policy makers' decisions about the transparency of, and access to, information affected by similar behavioural biases? These issues seem to call into question the central idea of 'informational efficiency' with which this work is concerned.
However, as Dombalagian notes, the maintenance of well-informed markets continues to be seen as a desirable regulatory outcome: "the immediate legislative response to the [financial] crisis reflects the importance of information flows". This is despite some participants' concerns that recent transparency initiatives will impact on the profits of information producers and traders, without benefiting the public.
The author's ambition is to develop a set of principles to guide information policy in capital markets. Existing policy, he contends, is overly reliant on the analysis of particular institutional forms and 'arbitrary classifications', rendered obsolete by new technology.
Of course, technology has always disrupted stock markets' ability to maintain their viability. For example, the telegraph and the telephone challenged the London Stock Exchange's status as a national exchange by allowing brokers to distribute prices - which could then be used as the basis for in-house crossings or over-the-counter trades.
Markets traditionally dealt with this problem by prohibiting members from participating in off-venue trading.
The difference nowadays is that states have dismantled these sorts of competitive restrictions, in recognition of the public resource attributes of pre- and post- trade information. As Dombalagian says, "information policy must increasingly consider the value of information to users, and not just the cost to originators". Since the distribution of information has been defined as a regulatory problem, the state now has the problem of determining the proper balance of information flows.
In the final analysis, it is questionable whether the author has developed any new principles to determine the balance of transparency and disclosure of information in capital markets. In this field the law is heavily dependent on the axioms of information economics, and any real innovation has to tackle these assumptions - for example, in the way that behavioural economists have done. However, in this work Dombalagian has usefully outlined the current state of play, and the challenges that technology presents policy makers seeking the efficient distribution of capital market information.