Current Issue

  • Volume 65,
  • Number 2 -
  • November 2015


The New Stock Market: Sense and Nonsense
Merritt B. Fox, Lawrence R. Glosten & Gabriel V. Rauterberg

How stocks are traded in the United States has been totally transformed. Gone are the dealers on NASDAQ and the specialists at the NYSE. Instead, a company’s stock can now be traded on up to sixty competing venues where a computer matches incoming orders. High-frequency traders (HFTs) post the majority of quotes and are the preponderant source of liquidity in the new market.

Many practices associated with the new stock market are highly controversial, as illustrated by the public furor following the publication of Michael Lewis’s book Flash Boys. Critics say that HFTs use their speed in discovering changes in the market and in altering their orders to take advantage of other traders. Dark pools—off-exchange trading venues that promise to keep the orders sent to them secret and to restrict the parties allowed to trade—are accused of operating in ways that injure many traders. Brokers are said to mishandle customer orders in an effort to maximize the payments they receive for sending trading venues their customers’ orders, rather than delivering best execution.

In this Article, we set out a simple, but powerful, conceptual framework for analyzing the new stock market. The framework is built upon three basic concepts: adverse selection, the principal-agent problem, and a multivenue trading system. We illustrate the utility of this framework by analyzing the new market’s eight most controversial practices. The effects of each practice are evaluated in terms of the multiple social goals served by equity-trading markets.

We ultimately conclude that there is no emergency requiring immediate, poorly considered action. Some reforms proposed by critics, however, are clearly desirable. Other proposed reforms involve a trade-off between two or more valuable social goals. In these cases, whether a reform is desirable may be unclear, but a better understanding of the trade-off involved enables a more informed choice and suggests areas in which further empirical research would be useful. Finally, still other proposed reforms are based on misunderstandings of the market or of the social impacts of a practice and should be avoided.

Death and Paperwork Reduction
Adam M. Samaha

How does government value people’s time? Often the valuation is implicit, even mysterious. But in patches of the federal administrative state, paperwork burdens are quantified in hours and often monetized. When agencies do monetize, they look to how the labor market values the time of the people faced with paperwork. The result is that some people’s time is valued over ten times more than other people’s time. In contrast, when agencies monetize the value of statistical life for cost-benefit analysis, they look to how people faced with a risk of death subjectively value its reduction. In practice, agencies assign the same value to every statistical life saved by a given policy.

This Article establishes these patterns of agency behavior and suggests that there is no satisfying justification for them. Welfarist and egalitarian principles, along with the logic of statistical life valuation, lean against the use of market wages to monetize a person’s time doing government paperwork. The impact of this practice might be limited, given the modest ambition of today’s paperwork reduction efforts. But time-related burdens—and benefits—are key consequences of government decisions in countless contexts. If we want to scale up a thoughtful process for valuing people’s time in the future, we will need new foundations.


Defining Attempts: Mandujano’s Error
Michael R. Fishman

The law of attempt requires a court to determine when trying to commit a crime is, in itself, conduct that deserves criminal punishment. Common-law courts were cautious not to push the boundaries of attempt crimes too far, and early definitions of attempt required that a defendant come very close to the completion of an intended crime before he could be convicted. As Congress has codified criminal law, it has created attempt statutes without defining attempt, presumably believing that courts would continue to use common-law meanings as they had always done. This is exactly what happened until the late twentieth century, when federal courts began to adopt a new, harsher formulation that had been proposed in the American Law Institute’s Model Penal Code (MPC). This Note examines the strange process through which federal courts expanded the definition of a background principle of criminal law, and argues that they were wrong to do so. Judges who ignore such deep common-law roots usurp the legislature’s role in defining crimes, and create confusion as to the true meaning of criminal statutes.