A debate swirls among those with interests in our financial and commodities markets:
“The markets are rigged!”
“Nay, the markets are broken!”
“High-frequency trading (HFT) is a cancer!”
“No, HFT is an invaluable liquidity source.”
“Exchanges have prostituted themselves to attract algorithmic traders!”
“We need a consolidated audit trail! We need global entity identifiers!”
“Regulators need better surveillance tools!”
“Let us have a transaction tax! Assess fines for excessive order cancellations!”
“No society can survive rapacious capitalism! More regulation!”
“Not more regulation—better enforcement of existing laws.”
“Eliminate continuous trading altogether. Batch auctions only!”
“Repeal Reg NMS. That will save us!”
“Don’t forget dark pools! Ban them, too!”
Few express happiness with the current market structure; knives are out for those who appear to profit excessively or unfairly from it. But the blame for these troubles is misplaced. Systematic traders and market makers perform useful functions. So, too, do banks, brokers, exchanges, asset managers, and—most important—individual investors. Capitalism, correctly defined, provides no refuge for interventionism or protectionism. The notion that we have too little regulation is ludicrous—millions of pages of tedious mandates say otherwise.
Our markets are dysfunctional, but the scapegoats are not the culprits. The actual problems are bureaucratic central planning and the replacement of free will by force; political patronage and the tendency of politicians to overreact to every perceived ill; bad law and judges in thrall to it; fiat money; and, underlying these forces, the destructive ideals of fascism and socialism.
Only anarchic markets—anarchic in the “free of rulers” sense of the term—are sufficiently adaptable, flexible, and responsive to changing conditions to serve the general welfare. But our markets approach the opposite extreme today: top-down rule to the point of ruination.
Certain of their own wisdom, enabled by fear and greed, our regulators engage in the economic equivalent of human medical experimentation. They erect and tinker endlessly with a monstrous web of rules and regulations, enriching lawyers and compliance hustlers with every change but otherwise making our markets ever more fragile. They have constrained the freedom of entrepreneurs to introduce novel market forms and methods, despite the amazing advances in science and technology that practically beg for them. Yet regulators force the market to accept their own untested, unproven, and ultimately unworkable ideas without a second thought.
Whether good intentions ever played a role in the formation of this apparatus is irrelevant. Central economic planning never works, irrespective of motivation. The politically powerful eventually capture the agencies set up to restrain them. These interests will always form a cartel under the bureaucracy’s protection, then use that bureaucracy to strangle competitive threats.
The results are predictable. Ordinary people withdraw from the markets. Capital dries up. Innovation and prosperity suffer. Beneficial intermediation leads to forced patronage. Soviet-style market commissars destroy natural networks and deprive the markets of beneficial network effects. They protect the inefficient, distort prices, encourage “malinvestment,” prevent markets from clearing, and create self-amplifying failure loops.
The structure and operation of secondary markets for stocks and bonds are rightfully matters for issuers and their investors to determine. Producers, consumers, and willing speculators should shape the markets for commodities, not political commissions or sophistic judges. Legal tender laws must be nullified if they cannot be repealed. Commercial law must be uniform in its application and protect the rights of all. The ongoing extermination of smaller banks, brokers, and other producers by regulatory diktat must cease.
Our markets arose naturally as fruits of decentralized, peer-to-peer communication. Competition combined with freedom of choice nurtured them from their primitive states into efficient, price-discovery-and-clearing mechanisms. Government intervention was not only never necessary, but also never helpful.
The conditions of vigorous competition, freedom to experiment, and voluntary adoption of the best ideas that gave rise to our great markets in the past can produce new markets of comparable greatness today. The successes of Amazon, eBay, Craigslist, and Alibaba, to name but a few examples, prove this is so. Trading and finance emerged and thrived in medieval fairs, on bridges and in church stairwells, in coffee houses and at curbs, and it did so for centuries. People are perfectly capable of exercising the same freedoms today and accomplishing as much good or more, especially given their access to the technological marvels of our time.
Correcting oppressive regimes from within is improbable, however. We cannot have free markets for financial goods and commodities by multiplying the regulated ones. Those who wish to enjoy the benefits of fully competitive, innovative markets must opt out of the commissars’ protection racket to do so.
Their protection was always a charade, anyway. Regulators have never supplied either the trust or reputation on which trade necessarily relies. Their role in the prosecution of fraud, theft, and trespass cases is virtually non-existent—criminal courts handle those matters. Similarly, civil courts are more than adequate for redress of torts. Regulators actually make it more difficult for victims of misdeeds to obtain relief through the courts.
All that is necessary for markets to form is a regular way and place for buyers and sellers to find one another and then, if they are so inclined, to negotiate and consummate their bargains. Over time, of their own accord, they develop habits, customs, and conventions they deem most helpful to the exercise; some of these eventually find their way into the law books. Opportunities for specialization or economies of scale or scope arise, leading some to supply one or more of the necessary factors of production as distinct enterprises. Our brokers, dealers, exchanges, and other intermediaries emerged from precisely this natural process.
None of this assumes or requires the existence of perfect people. Fallibility and criminality will sooner or later visit any field of endeavor. Anarchic markets admit of this eventuality and naturally become robust to it, through reliance on reputation and trust and the development of protocols for dealing with antisocial conduct. In markets ruled by force, however, fallibility and criminality are endemic. Worse, rule of markets by force obscures the signals that would otherwise arouse wariness in markets based on reputation and trust. Such rule also inculcates a false sense of security in market participants, increasing the likelihood they will be victimized.
In re-establishing free markets, we enjoy advantages our ancestors lacked. We have the means and knowledge to build decentralized, peer-to-peer communications networks where buyers and sellers may advertise their interests, find counterparts, and negotiate terms. We have commercial codes and resort to good laws to help us perfect our property rights, transfer risks, and adjudicate disputes. We have cryptographic protocols to help us protect privacy without sacrificing the beneficial roles of trust and reputation. We have the Internet, web browsers, and myriad programming languages at our disposal; messaging protocols and open-source software; venture capitalists and angel investors and crowdfunding sites; and emerging economies and industries with needs for capital and markets for their goods we can easily reach and provide.
Let us not suppose that free markets in financial goods and commodities are no longer possible—they are not only possible, but fully realizable, in full compliance with all existing laws and regulations. Learn the law. Use the knowledge to your advantage.
Now is the time for entrepreneurs to do what they do best. Discover and articulate the better way. Rally others to your vision. Temporary inconveniences will arise. The risk of failure will always be present. But the level of discontent with the prevailing market structure may never be higher, or the opportunity greater. Rule by force is always destructive and immoral. It is time for markets free of rulers—anarchic markets—to flourish again.
Tabb Forum first published this essay, earlier today, under the heading “The Market Structure Debate: A Manifesto for Anarchic Markets.”