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Discussions > Regulations > Why does US SEC's law prohibit using ebay.com or craigslist.org as platform to trade securities ?

Why does US SEC's law prohibit using ebay.com or craigslist.org as platform to trade securities ?

Complete message thread from old site

Mahesh Kumaraguru
1324 days ago,(2010/09/08)

Hi John,

Continued from http://fixprotocol.org/discuss/read/84880800

I would like to understand why US government forbids trading stocks on classifieds.

Regards,
K. Mahesh

FIX Trading Community
1321 days ago,(2010/09/11)

[ original email was from John Harris - john.harris@bondmart.com ]
Mahesh,

Government regulation is anti-competitive in purpose and design. Restraining competition to protect the market positions of incumbents is the entire point of the exercise. The leaders of every new industry will eventually clamor for regulation to raise barriers to entry and socialize the cost of consumer search. Of course regulation isn't sold that way - if its supporters told the truth, regulation would have no political support.

If people could trade securities directly, they wouldn't need brokers. The U.S. securities markets are so rigged in favor of incumbents that it is illegal for ordinary folks to form a securities exchange. Only broker-dealers and persons associated with broker-dealers enjoy that privilege.

Best,
John

> Hi John,
>
> Continued from http://fixprotocol.org/discuss/read/84880800
>
> I would like to understand why US government forbids trading stocks on classifieds.
>
> Regards,
> K. Mahesh

Mahesh Kumaraguru
1311 days ago,(2010/09/21)

Thanks John. Sorry for the late reply, busy relocating.

In your post http://fixprotocol.org/discuss/read/4db013c4 you mentioned "I can start a new national securities exchange in the United States today for the cost of my legal fees, staffing, and technology. A reasonably-focused business plan could be put into effect by an entrepreneur for less than $5 million, allowing several years of reserves for sufficient order flow to develop."

So the government has not exactly prohibited opening a new stock exchange, but placed some regulations. I would like to understand more of what are the regulations and what needs to be done after getting venture capital funding of U$D 5 million+ money to actually start a stock exchange.

To this same question posted in the International form, Jan Jonsson replied "... trading is actually simple, clearing and settlement is harder. Securities has to be hold somewhere, exchanged for money in a safe way (so you don't end up with a one legged trade, losing shares for no money, or pay for something that you never gets). ..." at http://fixprotocol.org/discuss/read/cea412de . So how does the regulations (within the context of US markets) prevent the situation that Jan describes.

At http://en.wikipedia.org/wiki/Block_trade it is stated "Block trade is a permissible, noncompetitive, privately negotiated transaction either at or exceeding an exchange determined minimum threshold quantity of shares, which is executed apart and away from the open outcry or electronic markets." So could not classifieds be used to negotiate block trades? Sounds silly, but thats what I am trying to understand.

Regards,
K. Mahesh

> Mahesh,
>
> Government regulation is anti-competitive in purpose and design. Restraining competition to protect the market positions of incumbents is the entire point of the exercise. The leaders of every new industry will eventually clamor for regulation to raise barriers to entry and socialize the cost of consumer search. Of course regulation isn't sold that way - if its supporters told the truth, regulation would have no political support.
>
> If people could trade securities directly, they wouldn't need brokers. The U.S. securities markets are so rigged in favor of incumbents that it is illegal for ordinary folks to form a securities exchange. Only broker-dealers and persons associated with broker-dealers enjoy that privilege.
>
> Best,
> John
>
> > Hi John,
> >
> > Continued from http://fixprotocol.org/discuss/read/84880800
> >
> > I would like to understand why US government forbids trading stocks on classifieds.
> >
> > Regards,
> > K. Mahesh

FIX Trading Community
1308 days ago,(2010/09/24)

[ original email was from John Harris - john.harris@bondmart.com ]
Sorry for my slow reply as well, Mahesh.

The best way to understand the requirements for establishing a national securities exchange - which is an exchange taking a particular regulatory form, as opposed to other possible forms - is by reading Section 6 of the Securities Exchange Act of 1934:
http://taft.law.uc.edu/CCL/34Act/sec6.html

In conjunction with that, read the form (in PDF) that such exchanges must file with the SEC:
http://www.sec.gov/about/forms/form1.pdf

Also indispensable to your study will be Regulation ATS, which (wisely) redefined exchanges in economic terms and explains by what avenues exchanges may be registered:
http://taft.law.uc.edu/CCL/regM/index.html

Essentially, operators of exchanges may choose among three regulatory forms: bank, broker-dealer, or national securities exchange.

A separate set of rules applies to commodities, agricultural contracts, etc. You will want to begin your studies, in that case, with the CFTC website:
http://www.cftc.gov/

I have not studied to what extent Dodd-Frank changes these rules.

Jan is right that exchanges and indeed all other financial intermediaries must consider clearing and settlement. Clearing is comparison and reconciliation of trade details. Settlement is fulfillment of the contract established at time of trade. It is wholly unnecessary for government to regulate these activities, but it does - also to protect a cartel.

The definition of a block trade that you provided is overly constrained and misses a vital component. A block trade is, quite simply, a trade undertaken for two or more accounts. That is to say, two or more distinct, legal entities are principals to the trade on at least one side of it. Any definitions related to trade size, matching protocol, etc. are arbitrary and miss the general point.

Sure, classifieds could be used to negotiate block trades, but under present, absurd law, the newspaper would have to register with the federal government before providing the service.

> Thanks John. Sorry for the late reply, busy relocating.
>
> In your post http://fixprotocol.org/discuss/read/4db013c4 you mentioned "I can start a new national securities exchange in the United States today for the cost of my legal fees, staffing, and technology. A reasonably-focused business plan could be put into effect by an entrepreneur for less than $5 million, allowing several years of reserves for sufficient order flow to develop."
>
> So the government has not exactly prohibited opening a new stock exchange, but placed some regulations. I would like to understand more of what are the regulations and what needs to be done after getting venture capital funding of U$D 5 million+ money to actually start a stock exchange.
>
> To this same question posted in the International form, Jan Jonsson replied "... trading is actually simple, clearing and settlement is harder. Securities has to be hold somewhere, exchanged for money in a safe way (so you don't end up with a one legged trade, losing shares for no money, or pay for something that you never gets). ..." at http://fixprotocol.org/discuss/read/cea412de . So how does the regulations (within the context of US markets) prevent the situation that Jan describes.
>
> At http://en.wikipedia.org/wiki/Block_trade it is stated "Block trade is a permissible, noncompetitive, privately negotiated transaction either at or exceeding an exchange determined minimum threshold quantity of shares, which is executed apart and away from the open outcry or electronic markets." So could not classifieds be used to negotiate block trades? Sounds silly, but thats what I am trying to understand.
>
> Regards,
> K. Mahesh
>
> > Mahesh,
> >
> > Government regulation is anti-competitive in purpose and design. Restraining competition to protect the market positions of incumbents is the entire point of the exercise. The leaders of every new industry will eventually clamor for regulation to raise barriers to entry and socialize the cost of consumer search. Of course regulation isn't sold that way - if its supporters told the truth, regulation would have no political support.
> >
> > If people could trade securities directly, they wouldn't need brokers. The U.S. securities markets are so rigged in favor of incumbents that it is illegal for ordinary folks to form a securities exchange. Only broker-dealers and persons associated with broker-dealers enjoy that privilege.
> >
> > Best,
> > John
> >
> > > Hi John,
> > >
> > > Continued from http://fixprotocol.org/discuss/read/84880800
> > >
> > > I would like to understand why US government forbids trading stocks on classifieds.
> > >
> > > Regards,
> > > K. Mahesh