Nerds on Wall Street: Math, Machines, and Wired Markets

12.1. To Protect and to Serve: Market Transparency

In financial theory, market transparency is a necessary condition for a free market to be efficient. In practice, at a micro scale it means that we can see the prices to buy and to sell securities (quotes) and the prices at which transactions actually occur (trades). A macro view of market transparency is that information about the securities being traded should be similarly reliable. Assuring that markets are transparent is a key role for regulators.

Public participation in the stock market grew dramatically in the early part of the twentieth century, and without regulation, abuses such as fraudulent information, extravagant fees, and extreme leverage became common. The last financial crisis of the magnitude we are seeing today made the need for regulation apparent. The Securities and Exchange Commission (SEC) explains its origins on its web site (http://sec.gov):

When the stock market crashed in October 1929, public confidence in the markets plummeted. Investors large and small, as well as the banks who had loaned to them, lost great sums of money in the ensuing Great Depression. There was a consensus that for the economy to recover, the public's faith in the capital markets needed to be restored. Congress held hearings to identify the problems and search for solutions.

Based on the findings in these hearings, Congress—during the peak year of the Depression—passed the Securities Act of 1933. This law, together with the Securities ...