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How Disruptive Innovation Necessitates Changes to Securities Regulation

While financial markets have endured the biggest impact of disruptive innovation, there’s still the absence of a rational explanation of the issue within both scholarly and policymaking circles, hence lack of effective regulations, says Professor Chris Brummer. One of the obstacles pertains to the diverse conduits through which new technology upsets market practices. It doesn’t help that many believe the function of securities regulation is backed by steady oversight, such as by clearing operations and broker-dealers. Evidently, how innovation affects twenty-first century securities markets calls for a review of relevant regulatory frameworks.

In this century, securities regulation faces more challenges than ever before, with new technology overwhelmingly altering the little market fundamentals that manipulate capital markets. Advanced computer resources and information technology has helped push to the sidelines important financial go-betweens, including investment banks and exchanges, paving the way for new market participants. When you also consider the negative impact of sporadic improvements to the capital raising process, you understand why private players and places with increased sophistication are playing host and intermediary to capital market liquidity, reducing the significance of public offerings.

Today, these advancements are the subject of tight scrutiny, considering the worldwide financial turmoil, and with market innovation and interference gaining traction extremely fast. More capital is being acquired via private placements than public offerings, thanks to the creation of new platforms to solve demand. Even the steadiest and most profitable of securities are easily exchanged via traditional venues as much as on the firms. Such disruptions keep accelerating with technological advancement, and collectively, they’ve left regulators without any effective response as they, too, attempt to determine their role in the new financial markets ecosystem. Securities regulators have reacted to such disruptions by technology in either of the two ways, according to Chris Brummer: not to do anything or embrace laughable “concessions,” such as Twitter discovery and the nod given to tweets as a means to engage investors.

To create a theoretical framework for handling disruptive technology calls for flexibility of insights to enable the accommodation and scrutiny of distinct and dynamic market environments against growing sets of regulatory responsibilities and policy objectives. In turn, it becomes vital to abandon customary conjecture regarding the way to operationalize regulatory framework.

Any highly effective securities regulation demands upgrades that accommodate the role of information technology (and virtual environments) in capital markets micro-ecosystems subject to extremely rapid change. Any such upgrades to securities rules have to address the computerized financial markets that have altered the understanding and operation of market liquidity. Equally essential, private marketplaces that are creating a consistently-expanding range of solutions catering for security offerings and trading require accommodation.

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