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Strategies & Challenges in Consumer/Investor Protection & Efficient Markets, Assignments of Law
The importance of consumer and investor protection in financial markets and explores three strategies: disclosure rules, conduct restrictions, and product restrictions. The focus is on conventional securities law and the economic incentives behind information acquisition and analysis. The document also touches upon the concept of informationally efficient markets and their benefits, as well as the challenges of adverse selection and insider trading.
What you will learn
- What is the Strong Form hypothesis and why does empirical data not support it?
- What are the three main strategies for promoting consumer/investor protection in financial markets?
- Why is it important for market participants to invest in information acquisition and analysis?
- Why is insider trading prohibited in financial markets?
- What are the benefits of informationally efficient markets?
Typology: Assignments
2020/2021
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- Today, our focus will be on the objective of consumer/investor protection and three strategies that are often used to promote it within financial markets: disclosure (including transparency) rules, conduct restrictions (prohibitions against insider trading and market manipulation) and product restrictions (the scope of securities law protections).
- Please note that our focus will be conventional securities law: i.e. the law applying to the issuance and trading of shares, bonds, and other financial instruments. While similar mechanisms often apply to other financial products and services, we will not deal with them in this course.
- “With “profit” in this case meaning that you would expect the value of the shares, reflecting this new information, to go up after you’ve bought them.
- The reason why the Strong Form hypothesis is more efficient is not necessarily intuitive. However, what it is effectively saying that market prices will somehow reflect information that is potentially only in the possession of a person. Not surprisingly, empirical data does not support the Strong Form hypothesis.
- In this respect, we would expect informationally efficient markets to be less prone to market abuse and other practices that impose costs on less informed counterparties. In effect, less informed traders in an informationally efficient market get to free ride off the pricing information generated by more informed traders.
- All of which makes informationally efficient markets more attractive to a wider cross-section of traders: thereby increasing the number of traders, the volume of trading, and – in theory – market liquidity.
- Market participants want to protect the economic value of information so they themselves can profitably trade on it as long as possible.
- Issuers and their managers do not want to disclose damaging information that might hurt the value of their shares.
- Issuers and their managers do not want to disclose information to competitors.