Federal policymakers risk weakening their regulatory abilities if they fail to limit the role they play in overseeing the exploding e-finance industry, U.S. Federal Reserve Chairman Alan Greenspan warned Monday.
The rapid evolution of the Internet and the information technology sector has triggered fundamental changes in the execution of stock trades. In a speech at the Financial Markets Conference in Atlanta, Georgia, Greenspan said that these advances pose numerous short-term challenges for both government regulators and financial corporations.
Greenspan cautioned that some of these institutions will “suffer erosion of their franchisee values, as competitors, new and old, prove more adept at tapping the potential gains from the new technology.”
Regulators Must Adapt — Carefully
To adapt to this shift and ensure that their capabilities are not impaired, regulators will need to consistently evaluate their approaches to determine whether their effectiveness has been undermined by technological developments, then make any necessary changes.
“However, in responding to these challenges,” said Greenspan, “the authorities would do well to heed the advice offered by the medical profession and, first, do no harm.”
Weeding Out Losers
Additionally, federal lawmakers are currently examining ways to regulate a variety of aspects of the Internet, including privacy and taxation. Greenspan said that policymakers also need to exercise caution when it comes to undertaking efforts to direct changes in the financial market infrastructure — such as trading, payment, clearance and settlement systems.
Instead, the economics of supply-and-demand will inevitably weed out those institutions that are not equipped to forge ahead.
“Equity markets will inevitably shift capital from the losers to the winners,” Greenspan said. “In most cases, the losers will fade away without placing any burdens on their creditors. But some undoubtedly will fail. This is a tendency that should not be resisted.”
Let the Market Decide
While policymakers should not remain inactive in the assessment of technological strides, their role should be a “constructive” one that will help balance the market’s equilibrium during the transition.
“Government authorities are poorly suited to picking winners and losers among competing technologies and market structures,” he added. “Innovations have to be tested by the marketplace — ultimately by consumer choice.”
New Technologies Make Impact
Greenspan’s comments come as the markets find themselves in the midst of dramatic changes, with millions of new investors entering the trading arena.
Armed with information gleaned from the Internet or actually executing trades through online brokerages, these investors are helping to alter the financial landscape. Numerous emerging electronic communications networks are also applying pressure to the New York Stock Exchange and the Nasdaq.
“Profound shifts have occurred in equity markets as powerful computers and new telecommunications technologies, in combination with deregulatory innovations by the Securities and Exchange Commission, have facilitated the development of new trading venues for equities,” said Greenspan.
“These new venues offer investors a wide range of alternatives for entering orders and executing trades,” he added.