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doi:10.1016/S0144-8188(00)00047-8 | How to Cite or Link Using DOI
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Financial intermediation in the securities markets law and economics of conduct of business regulation

Alessio M. PaccesaCorresponding Author Contact InformationaE-mail The Corresponding AuthorE-mail The Corresponding Author

aBanca d’Italia, Law and Economics Research Department, Rome, Italy

Accepted 6 September 2000. Available online 6 February 2001.

Abstract

The economic theory explains the role performed by intermediaries in financial markets. In securities markets, in particular, intermediaries act as facilitators of the financial exchange. In this context, conduct of business regulation is justified on the basis of structural problems of asymmetric information affecting the relationship between securities professionals and the individual investor.

In this paper, two major conduct of business rules are analysed in the light of the kind of market imperfections they should be intended to address: the suitability and the anti-churning rules. From a functional perspective, the analysis merges major insights of financial theory with a comparative discussion of the legal rules in both the U.S. and the European Union. Law and economics approach to the matter leads to a much broader and more economically sound interpretation of the “churning” problem. This is related to an agency-based explanation of one of the most topical puzzles under debate in financial economics: the problem of noise trading.

Keywords: Churning; Suitability; Noise trading; Securities Regulation

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Corresponding Author Contact InformationTel.: +39-06-47925331; fax: +39-06-47925332 erbusiness.it


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