Financial intermediation in the securities markets law and economics of conduct of business regulation

The economic theory explains the role performed by intermediaries in financ ial markets, In securities markets, in particular, intermediaries act as fa cilitators of the financial exchange. In this context, conduct of business regulation is justified on the basis of structural problems of asymmetric i nformation affecting the relationship between securities professionals and the individual investor. In this paper, two major conduct of business rules are analysed in the ligh t of the kind of market imperfections they should be intended to address: t he suitability and the anti-churning rules. From a functional perspective, the analysis merges major insights of financial theory with a comparative d iscussion of the legal rules in both the U.S, and the European Union. Law a nd economics approach to the matter leads to a much broader and more econom ically 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. (C) 2000 Elsevier Sc ience Inc. All rights reserved.