Government regulation does not work as well as regulation by market forces. Government regulators have neither adequate knowledge nor good incentives to regulate effectively. The regulated parties always try, often successfully, to capture the regulatory process or game the system to their own advantage.
Profit and loss in a system of private ownership and free exchange, by contrast, continuously regulates market participants’ actions. It rewards those who create value for others, and punishes those who destroy value. The whole system is constantly trying out and evaluating new approaches. Free markets thus tend, imperfectly but much better than bureaucracies, to discover and put in place what works well and eliminate what doesn’t.
The Wall Street Journal on April 3rd had a good editorial on the flap about high-speed trading that illustrates what I mean: Are “U.S. equity markets …rigged against the individual investor by high-speed traders”? If so, the Journal claims, they have “been rigged by none other than the market regulators at the Securities and Exchange Commission. And ironically, their intent was to rig the game in favor of the individual investor.” But unintended consequences arose, of course:
[T]oday’s byzantine U.S. equity markets exist because Washington required them to be exactly as they are, and to bounce orders all over New York, New Jersey and elsewhere in a required effort to give the customer the best deal, as defined by Washington.
Many are now proposing still more, or at least what they hope will be better, government regulation of securities markets. The Journal—bless its heart—suggests that we free our equity markets instead:
The bolder and better idea, if one wishes to see if markets can outperform the “rigged” game devised by the feds, is to let investors choose the consumer protections they favor. Why not let exchanges set their own rules and let companies and customers decide if they wish to trade there? One could also let customers decide whether they even need a broker or an exchange. Maybe eBay could do better. Or maybe in a genuine free market, business would gravitate back to the NYSE.