Perestroika on Wall Street: the future of securities trading.

• Author: Grundfest, Joseph A.

Perestroika on Wall Street: the future of securities trading

The title of this article could well prompt you to ask two distinct questions: First, what does perestroika have to do with Wall Street? And, second, who says securities trading has a future?

"Perestroika" is a Russian word that describes the market-oriented restructurings of the economic system now underway in the Soviet Union. Mikhail Gorbachev has recognized, much to his credit, that centralized planning simply does not work--especially in a modern, high-technology, internationalized marketplace. As technology has raced farther ahead, the Soviet Union, burdened with a system that relies on centralized economic planning, has fallen farther behind. The Soviet Union has now reached a point where there can be no doubt that it is simply not competitive with the United States, Japan, and Western Europe in every significant area other than raw military might.

Because Mr. Gorbachev seeks, in part, to prevent the Soviet economic system from falling even farther behind the free world, he is trying to introduce competition into an otherwise highly regimented social and economic system. This shift in economic strategy comes as a substantial shock to Soviet society. The shock is profound because competition can be quite messy and chaotic, particularly to a society that has, over decades, grown accustomed to a system of centralized planning that at least gives the appearance of being predictale and controlled.

Closely related to perestroika is Mr. Gorbachev's policy of "glasnost," or openness, which, in its own limited way, has revolutionized communications behind the Iron Curtain. Mr. Gorbachev recognizes that some measure of free and open communication is necessary in order to support innovation and experimentation in an evolving economic environment. Accordingly, perestroika in the economic marketplace walks hand in hand with glasnost in the marketplace for ideas.

Now, what does this Neo-Marxist dance with capitalism have in common with Wall Street? A lot, at least by analogy. Because if, in the wake of October 19, 1987, our capital markets do not begin a technological perestroika designed to adapt their internal structures to powerful, changing realities, as well as an equally important glasnost designed to make our markets more informationally transparent, then we risk losing our leadership position in the international financial services industry to foreign competitors who adjust more adeptly and rapidly.

Thus, either we begin our own domestic process of perestroika and glasnost on Wall Street, and move aggressively in a direction that embraces new trading technologies, new information dissemination procedures, and new types of securities instruments, or we will find ourselves saddled with arthritic markets that are better suited to the nineteenth century than to the twenty-first. Make no mistake about it, the long-run survival and vitality of our domestic securities market does not depend primarily on the introduction of circuit breakers, prohibitions on program trading, restrictions on index arbitrage, tighter short-sale restrictions, or any other intrusive regulatory mechanisms. Our survival depends primarily on innovation and competition.

Granted, some regulatory measures can play useful roles as political or financial stop gaps, pending more progressive market reforms. However, none of these regulatory measures can, in and of themselves, bring our markets to the cutting edge of the highly technological and competitive environment that is certain to prevail in a much more internationalized and not very distant future. Indeed, to the extent that these measures provide a sense of "breathing room," and create the superficial impression that all is "under control," they may actually erode the sense of urgency and conviction that may be necessary in order for innovation to succeed in our markets.

To succeed, our markets and our market regulators must stop fighting technology. They must learn instead to harness its energy. This process will not be easy because many vested interests are quite happy with the status quo and are clearly threatened by changes that the future portends. Even individuals without an economic stake in the status quo can be frightened by a future that looks so different from the relatively recent past. While nostalgia is understandable, it is a powerful enemy in the evolutionary process. If people want to trade the good old-fashioned way--the way they did back in the '40s, '50s, and '60s--we might well drown in our memories as a more forward-looking world passes us by.

Two innovations

To leap from these easy generalities to more controversial specifics, I would like to discuss two examples of a technologically induced perestroika that could, sooner or later, affect Wall Street, Chicago, and...