Kevin Haeberle has a new paper entitled Marginal Benefits of the Core Securities Laws.  He argues that for long-term, diversified investors, additional disclosure-oriented, insider-trading-related, or anti-fraud protections are not likely to provide substantial benefits to these investors.  The paper is worth reading simply for its clear explanations of nuanced market dynamics, as animated by principles from market microstructure economics.  It lucidly explains how bid-ask spreads and trade “footprint” costs arise, and the role information asymmetry plays in each. He argues that these measures of information asymmetry costs for long-term, diversified investors are now extremely limited. He also argues that a number of market mechanisms allow these investors to avoid these costs more generally. With, for example, bid-ask spreads for most large public corporations now literally at their legal minimum size, we will most likely not generate any real investor protection benefits by trying to protect investors by further reducing information asymmetry in secondary market trades. Interestingly, as he explains, this dictates that there is little to gain from using the core securities laws to reduce information asymmetry even if the law and economics thinking on how price discounts protect these same investors is wrong. Investor protection efforts should therefore be the focus on other areas of securities regulation, such as market structure and broker-dealer regulation.

The draft makes me think about Ann Lipton's paper pointing out that many of the purportedly investor-related reforms pushed in recent years haven't really been about investors. There may be good reasons to want additional disclosures from corporations–but we should not pretend that we need the information for investors to be able to efficiently trade stocks.