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Competition among Exchanges and Enforcement Policy

Author/Editor: Cecilia Caglio | Andrea Pescatori
Authorized for Distribution: February 1, 2013
Electronic Access: Free Full Text (PDF file size is 1,030KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: In this paper, we explore how competition among stock exchanges, operated as self-regulatory organizations (SROs), affects the design of their members' surveillance. We develop a model where two for-profit SROs compete for trading volume, while brokers execute transactions on behalf of the investors and may misreport the true cash flow. The SROs can deter a fraud by announcing an investigation and imposing a monetary penalty.The success of the investigation depends upon both the amount of resources devoted to monitoring and the efficiency of monitoring technologies. We show that when contracts are incomplete and investors do not have perfect information about the monitoring efficiency, competition among exchanges induces a race to the bottom in enforcement policy and a reduction in total welfare, compared to the case of a monopolist SRO.
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Series: Working Paper No. 13/37
Subject(s): Stock markets | Competition | Securities regulations
    Published:   February 1, 2013        
    ISBN/ISSN:   9781475516784/1018-5941   Format:   Paper
    Stock No:   WPIEA2013037   Pages:   31
    Price:   US$18.00
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