Disruptive Technology and Securities Regulation

Nowhere has disruptive technology had a more profound impact than in financial services—and yet nowhere do academics and policymakers lack a coherent theory of the phenomenon more, much less a coherent set of regulatory prescriptions. Part of the challenge lies in the varied channels through which innovation upends market practices. Problems also lurk in the popular assumption that securities regulation operates against the backdrop of stable market gatekeepers like exchanges, broker-dealers, and clearing systems—a fact scenario increasingly out of sync in twenty-first-century capital markets. This Article explains how technological innovation “disrupts” not only capital markets but also the exercise of regulatory supervision and oversight. It provides the first theoretical account tracking the migration of technology across multiple domains of today’s securities infrastructure and argues that an array of technological innovations are facilitating what can be understood as the disintermediation of the traditional gatekeepers that regulatory authorities have relied on (and regulated) since the 1930s for investor protection and market integrity. Effective securities regulation will thus have to be upgraded to account for a computerized (and often virtual) market microstructure that is subject to accelerating change. To provide context, this Article examines two key sources of disruptive innovation: (1) the automated financial services that are transforming the meaning and operation of market liquidity; and (2) the private markets—specifically, the dark pools, electronic communication networks, 144A trading platforms, and crowdfunding websites—that are creating an ever-expanding array of alternatives for both securities issuances and trading