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Regulating Competition in Stock Markets: Antitrust Measures to Promote Fairness and Transparency through Investor Protection and Crisis Prevention

Lawrence R. Klein (Editor), Viktoria Dalko (Editor), Michael H. Wang (Editor)
ISBN: 978-1-118-23686-4
464 pages
April 2012
Regulating Competition in Stock Markets: Antitrust Measures to Promote Fairness and Transparency through Investor Protection and Crisis Prevention (1118236866) cover image


A guide to curbing monopoly power in stock markets

Engaging and informative, Regulating Competition in Stock Markets skillfully analyzes the impact of the recent global financial crisis on health and happiness, and uses this opportunity to put regulatory systems in perspective. Happiness is lost because of emotional and physical health deterioration resulting from the crisis. Therefore, the authors conclude that financial crisis prevention should be the focus of public policy.

This book is the most comprehensive study so far on potential risks to the stock market, especially various forms of market manipulation that lead to mania and eventual crisis. Based on litigation cases from international stock markets, and borrowing multidisciplinary findings in the fields of finance, economics, accounting, media studies, criminology, legal studies, psychology, and medicine, this book is the first to provide thorough micro-level regulatory proposals rooted in financial reality. By focusing on securities trading, they apply antitrust measures to limiting monopolistic power that is used for the manipulation of investors' perception and monopolistic profit. These proposals are quantifiable, adjustable, inexpensive, and can be easily implemented by any securities regulating agency for real-time oversight and daily operations.

  • The recommendations found here are intended to improve the fairness and transparency of the financial markets, thereby perfecting the market competition, protecting investors, stabilizing the market, and preventing crises
  • Explores how avoiding crises can to contribute to a more scientific, health aware, and civilized economic and social development
  • Written by a team of authors who have extensive experience in this dynamic field, including Nobel Laureate Lawrence R. Klein

Since the founding of the first, organized stock exchange in Amsterdam 400 years ago, no systematic economic research results on stock markets have been implemented in stock market regulation around the world. Regulating Competition in Stock Markets aims to fill this void.

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Table of Contents

Foreword xiii

Introduction xix

Acknowledgments xxvii

PART 1 Happiness, Health, and Longevity during the 2008 Global Financial Crisis

CHAPTER 1 Does the Recent Financial Crisis Impact Health and Happiness? 3
Xin Yan, Lawrence R. Klein, Viktoria Dalko, Ferenc Gyurcsany, Michael H. Wang, and Christine Huang

Concepts of Happiness 4

The History of Modeling Health and Financial Crisis 5

Our Three Objectives 9

Our Financial Crisis–Impact Model 12

Results 16

Financial Crisis as a Major International Traumatic Event 21

Can We Just Wait for the Next Financial Crisis? 24

Notes 25

CHAPTER 2 Profound Unhappiness in the International Recession: The Case of Suicide in Industrialized Countries 27
M. Harvey Brenner

Background 29

Two Concepts of Happiness 30

A Psychological Viewpoint 33

Unhappiness, Hopelessness, and Depression 35

Hypothesis: Happiness as Accomplishment Predicts Happiness as Pleasure 36

Analysis 39

Conclusions 41

PART 2 Imperfect Competition and Antitrust Regulations in the Stock Markets

CHAPTER 3 Preventing Stock Market Crises (I): Regulating Shareholding Concentration 47
Xin Yan, Lawrence R. Klein, Viktoria Dalko, Ferenc Gyurcsany, and Michael H. Wang

Is Perfect Competition Possible in the Stock Market? 48

Concentration, Manipulation, and Monopoly 49

Can Stock Markets Still Be Manipulated? 51

Theoretical Literature on Market Manipulation 65

We Choose the Accumulation-Lift-Distribution Scheme to Study 68

Manipulative Objective of Each Stage of the ALD Scheme 70

Are Monopolistic Practices Involved in the ALD Scheme? 73

Antitrust Against ALD Manipulation 74

Existing Approach and Our Proposal to Regulate Market Manipulation 75

Regulatory Proposal: A Generic Recommendation 76

Benefits of Regulating Concentration 77

Concluding Remarks and Future Research 79

Notes 80

CHAPTER 4 Preventing Stock Market Crises (II): Regulating Trade-Based Price-Lifting 83
Xin Yan, Lawrence R. Klein, Viktoria Dalko, Ferenc Gyurcsany, and Michael H. Wang

How Is Large Price Impact by Other Investors Induced? 84

Empirical Research on Volume-Based Price Impact 84

The SEBI Prosecution Cases 87

The Manipulation Tactics Used in Price Lifting 89

Anatomy of an Investor’s Trades in a Stock during a Trading Day 104

Unified Approach to Surveillance and Regulatory Measures 105

Selling Speed in Distribution and Short Selling 109

Concluding Remarks 110

Notes 110

CHAPTER 5 Preventing Stock Market Crises (III): Regulating Earnings Manipulation 113
Xin Yan, Lawrence R. Klein, Viktoria Dalko, Ferenc Gyurcsany, and Michael H. Wang

How Important Is Earnings Information to Investors? 114

Earnings Manipulation Is Problematic 116

How Is Earnings Manipulation Done in Reality? 118

Earnings Manipulation Is Pervasive 121

Earnings Manipulation Is Persistent 124

Auditors Frequently Fail to Stop Earnings Manipulation 126

Proposals to Effectively Regulate Earnings Manipulation 129

Concluding Remarks 130

Notes 131

CHAPTER 6 Preventing Stock Market Crises (IV): Regulating Trading by Corporate Insiders 133
Xin Yan, Lawrence R. Klein, Viktoria Dalko, Ferenc Gyurcsany, and Michael H. Wang

What Is the Purpose of Trading by Corporate Insiders? 134

The Relationship between Earnings Manipulation and Trading by Corporate Insiders 137

Trading by Corporate Insiders Is an Important Drive for Earnings Manipulation 138

Insider Trading with Earnings Manipulation Is Not Effectively Regulated 149

Information Monopoly and Information Asymmetry 154

Proposals to Effectively Regulate Trading by Corporate Insiders 155

Discussion of the Four Proposed Measures 161

Conclusion 163

Notes 163

CHAPTER 7 Preventing Stock Market Crises (V): Regulating Information Manipulation by Sell-Side Analysts 165
Xin Yan, Lawrence R. Klein, Viktoria Dalko, Ferenc Gyurcsany, and Michael H. Wang

What Is the Actual Role of Sell-Side Analysts? 166

How Is the Value of Sell-Side Analysts’ Work Defined? 168

Analysts Can Hardly Attend Fairly to Public Interests 176

Analyst-Generated Information Benefits the Informed 179

Value of Analysts’ Recommendation and Forecast to Issuers 181

Value of Analysts’Work to Investment Banks and Brokerage Firms 186

Comparison of Sell-Side Analysts and Corporate Insiders 190

Legal Difficulty in Prosecuting Wrong doing by Sell-Side Analysts 192

Regulatory Proposals 193

Discussion of the Regulatory Proposals 194

Concluding Remarks 196

Notes 196

CHAPTER 8 Preventing Stock Market Crises (VI): Regulating Information-Based Manipulation 199
Xin Yan, Lawrence R. Klein, Viktoria Dalko, Ferenc Gyurcsany, and Michael H. Wang

All Types of Market Manipulation Come Down to Perception Manipulation 200

Anatomy of SEC Market Manipulation Litigation Cases (1999 to 2009) 201

Information-Based Manipulation Schemes in Practice 205

Information-Based Manipulation Schemes on the Internet 213

Analysis of Information-Based Manipulation 221

Regulatory Recommendations 225

Discussion of Information Monopoly in Reality 229

Concluding Remarks 232

A Perspective for Future Research 233

Notes 234

CHAPTER 9 Preventing Stock Market Crises (VII): Principles of Regulating New Reporting That Cultivates Long-Run Manias and Triggers Short-Run Panics 237
Xin Yan, Lawrence R. Klein, Viktoria Dalko, Ferenc Gyurcsany, and Michael H. Wang

Information Monopoly and Certain Business News Reporting 238

A Prolonged Mania in Stock Buying Leads to a Marketwide Crisis 241

Some Business News Reporting Is Capable of Moving Stock Prices in the Short Run 242 Investors in the Long Run 249

Why Is Business News Reporting Usually Upward-Biased? 256

Proposed Principles to Regulate Relevant Business Journalists and Mass Media 262

Empirical Research on the Impact of Some Breaking News on Stock Markets 265

Trading Halts, Circuit Breakers and Price Limits: Effectiveness and Limitations 269

Regulatory Principles in Case of Breaking News 273

Concluding Remarks 274

Notes 275

Bibliography 277

About the Editors 315

Index 317

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Author Information

LAWRENCE R. KLEIN is Benjamin Franklin Professor Emeritus of Economics at the University of Pennsylvania and a Nobel laureate in Economics. He's published widely and is the intellectual father of Project LINK, a global consortium of national economic forecasting established in 1969 and coordinated in part by the United Nations Department of Economic and Social Affairs. Klein received a PhD in economics from the Massachusetts Institute of Technology.

Viktoria Dalko is a JoAnne Fussa Distinguished Teacher of the Graduate Program in Management, Harvard University Extension School, and a Global Professor of Finance at Hult International Business School in Boston, Dubai, London, San Francisco, and Shanghai. Dalko received a PhD in economics from the University of Pennsylvania.

Michael H. Wang is cofounder, Vice President, and Director of Research of the Boston-based think tank Research Institute of Comprehensive Economics. Wang obtained a PhD in mechanical engineering from the University of Illinois at Urbana-Champaign.

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