We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
TAXING FICTIVE ORDERS: HOW AN INFORMATION-FORCING TAX CAN REDUCE MANIPULATION AND DISTORTION IN FINANCIAL PRODUCT MARKETS.
- Authors
Beylin, Ilya
- Abstract
Electronic exchange "order books " reflect ready supply and demand for financial products. This article proposes that order book information is a public good and should be protected as such with an automated Pigovian tax. Traditional prohibitions on market manipulation do not reach conduct that distorts order book information without intent to exploit the distortion. As a result, anti-manipulation authorities do not deter trading activity that generates market distortion as an incident to trading activity rather than as an end goal. The great majority o f orders entered on contemporary electronic markets are cancelled before being executed. The prevalence of order cancellations makes order book information less reliable. The Dodd-Frank Act has prohibited "spoofing, " or placing an order with intent to cancel it. The post- Dodd-Frank regime, however, is grossly inadequate. Punishing only intentional order cancellations is both under- and over-inclusive. Unintended order cancellations are not simply likely, but represent the great majority of orders in status quo market dynamics. Unpremeditated order cancellations can pollute the price signal no less than premeditated cancellations. On the over-inclusive side, consistent rates of bid and offer cancellations should not significantly distort prices and thus should not be punished even when planned. Furthermore, the current pre-requisite of intent results in regressive enforcement, high enforcement costs, and gross underenforcement. Finally, the regime (and the literature) neglect the costs of artificial silence and focus only on the excesses of noise. Nothing is being done to deter artificial dearths of orders. The Pigovian tax approach proposed by this article addresses these shortf alls. The proposed approach also steers clear of typical concerns with financial transaction taxes through focusing on cancelled rather than executed orders. Regulators have been concerned with their lack of authority to police trading that generates high volumes o f cancelled orders. This article explains why such authority is justified, as well as how current anti-manipulation regimes can be buttressed.
- Subjects
FINANCIAL services industry; PIGOVIAN tax
- Publication
University of Cincinnati Law Review, 2017, Vol 85, Issue 1, p91
- ISSN
0009-6881
- Publication type
Article