The securities market itself is adapting all the time. You’ve got to adapt to keep up. Fortune Magazine interviewed Richard Bookstaber, who is now consulting for the SEC. He discusses the difficulty of regulating markets:
What is the hardest part of securities regulation?
If you find a valve in a nuclear power plant that isn’t working right and replace it, the valve is not going to try to fool you into thinking it’s on when it’s really off. In the market, traders will try to fool you. In other words, there’s a realm of feedback and gaming that can occur in the financial markets that doesn’t occur in an engineering system. That makes developing rules much more difficult for Wall Street than for safety in engineering.
When you observe the market, the very fact that you are observing it as a regulator almost guarantees that the people in the market will react as a military adversary and develop the best defense against it. They will try to find ways around it.
The market is a feedback system. And the most accurate feedback you’re going to find is price. Price isn’t perfect, but it’s probably better than anything else.
