The Stock Exchange as Multi-sided Platform and the Future of the National Market System

Since Regulation National Market System (Regulation NMS) came into force a decade ago, computer technology has transformed the stock markets. While Regulation NMS benefited investors by lowering stated transaction costs, it also created today’s complex and fragmented trading system. An increasing amount of trading now occurs off-exchange in dark pools and other “non-lit” venues, and hidden costs proliferate. In addition to the profits taken by high-frequency traders, these include the defensive costs of the technological arms race, the possibility of another “Flash Crash,” public suspicions of “rigged” stock markets, reduced allocative efficiency, and rising proprietary data fees paid by stockbrokers and institutional investors. In prioritizing the goal of competition, Regulation NMS failed to take into account the stock exchange’s inherent economic nature as a multi-sided platform and the negative effects of setting the existing exchanges into competition with one another. Furthermore, digital technology undermines a number of Regulation NMS’s grounding assumptions. Given the nature of modern stock exchange as a digital multi-sided platform, it is time to reconsider the central limit order book (CLOB) proposals made in the 1970s through the early 2000s. An updated proposal for a “virtual CLOB” would allow the current exchanges to remain in existence, thereby avoiding a single monopoly exchange, while eliminating or mitigating many of the most pressing problems of the current system