The research covering over 30 markets shows that while improving market fairness helps reduce transaction costs, not all market design changes simultaneously enhance both fairness and efficiency.

“The mandate of securities market regulators around the world is very consistent, namely, to ensure that securities markets (and changes thereto) are fair and efficient, said CMCRC CEO Professor Michael Aitken. “Notwithstanding the consistency of this mandate, it is somewhat surprising that less than a handful of regulators have actually formally defined fairness and efficiency. Our research addresses this task and defines the terms such that one can build measurement proxies for each.”

The research defines a fair market as one in which prohibited trading behaviours are minimised. This requires proxies for insider trading, market manipulation and broker-client conflict (eg front running) the three key prohibited trading behaviours. An efficient market is defined as one in which it is cheap to trade and in which the price that one is trading reflects all available information. This suggests the need to measure transaction costs (e.g. bid-ask spreads) and price discovery (volatility).

“Our study provides the first tangible evidence that markets which are fairer are more efficient, showing that closing auctions increase market fairness and lower the cost of trading,” says Professor Aitken. “However, it also reveals evidence that market designs like circuit breakers and the prohibition of short positions increase market fairness but reduces efficiency. The broader implication of our research is that market design matters and there may be a fairness-efficiency trade off.” 

The research by CMCRC also shows that the likelihood of adopting real-time surveillance systems increases as the number of market manipulation alerts rises. Conversely, the adoption of real-time surveillance is less likely where securities law violations contain stipulated penalties – as is the case in civil-law vis-à-vis English common law jurisdictions.