Market Structure for Institutional Investors : Comparing the U.S. and the E.U. Regimes

In 2007, both the U.S. and the E.U. implemented sweeping reforms in the regulation of stock exchange trading and market structure, following diametrically opposite approaches. While the E.U. effort is deregulatory and decentralized, allowing investors' choices to determine how different marketplaces interact, U.S. rules are detailed and interventionist, mandating specific principles for the interaction of orders. To explore the impact of these surprising choices of regulatory design, this article focuses on institutional investors, who have come to dominate stock exchange trading in recent years. Because these investors trade in large blocks, their orders may affect the stock price to their detriment, increasing their liquidity costs. However, the new U.S. rules limit institutional investors' flexibility in choosing a trading strategy that would reduce their liquidity costs effectively. As a result, these rules introduce unnecessary volatility in the market and may harm the informational value of stock prices. Instead, the European framework relies on disclosure of quote and last sale information, and helps investors monitor market participants more successfully