The Role of Investors
Law properly distinguishes between institutional and retail investors. The former require regulation to ensure adequate capital reserves, to protect against fraud, and to prevent systemic failure of the financial system. The latter require protection to ensure that the markets provide a level playing field, to assure that market prices are not manipulated and are set by material information about listed entities, and to provide effective remedies against violations of trust and breach of market rules. Investor protection legislation is designed to induce retail investors to take risks.
The macroeconomic function of financial markets and investor protection are inextricably related. One observer has succinctly stated the connection in the “modern context”:
“In the modern economy, the intermediary’s brokerage services are essential to matching suppliers and issuers of capital, and these securities intermediaries inhabit a position of relative trust and confidence vis-à-vis their capital supplying clients. Empirical evidence shows that the rise in financial intermediation bears a direct correlation with economic development, as financial intermediation is closely related to the growth of capital markets” (Iris H-Y Chiu, Securities Intermediaries in the Internet Age and the Traditional Principal-Agent Approach Model of Regulation: Some Observations from European Union Securities Regulation, 2 Va. L. & Bus. Rev. 307, 309 (2007) – see reference list. This site does not enter the deeper, and complex, debate about whether law does or does not matter to financial market performance. E.g., see Elís Ferran, supra – see reference list)
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Consequently, this site, prior to assessing the merits of MiFID, describes and criticises theories of investor protection, and selectively compares EU and US approaches to governmental market intervention. This larger context creates the analytical framework required to understand MiFID and its likely effects on building a EU securities market.
