June 01, 2014
Is the Stock Market a Commons?
Posted by Michael Burstein

I read Michael Lewis’s Flash Boys last weekend instead of grading my exams.  But since I’m now using the book as the basis for a somewhat scholarly blog post, I can chalk it up as virtuous procrastination.  I’m generally a fan of Michael Lewis’s writing, and I enjoyed this book (and whipped through it).  The book’s central argument – that high frequency traders have colluded with the institutional exchanges and investment banks to rig the market so that investors don’t get the best price for their trades – has been the subject of critiques that I find persuasive.  But for someone who previously did not know much about the inner workings of the stock market, like myself, the book was enlightening in ways that go beyond its central claims.

In my previous post, I mentioned Elinor Ostrom’s work on natural resource commons.  Ostrom won the Nobel Prize in economics for her studies of how discrete communities can sustainable manage common pool resources – shared fisheries, irrigation sources, etc. – in the absence of either private property rights or government intervention.  Drawing upon dozens of case studies, Ostrom and her collaborators over the years concluded that it was sophisticated institutional design that enabled resource sharing, and they articulated a framework (called the “institutional analysis and design” or “IAD” framework) to help organize the analysis of institutions for collective governance.  This framework requires that careful attention be paid to the characteristics of the resource being governed, the actors in the arrangement and their interests, the rules in use of the institution, and several other factors.  As I noted previously, IP scholars have drawn upon Ostrom’s work to conceptualize how information might be produced and shared outside the strictures of market or government production models.  But I wonder if the framework has even broader utility.

This brings me back to Flash Boys and the question I posed in the title of this post: Is the stock market a commons?  In one sense, the question seems to answer itself.  The commons is an alternative to the market.  Interests in equity shares are, of course, not allocated through a commons.  They are bought and sold as private property.  But Flash Boys illuminates the complex mechanisms behind the functioning of that market: how price information is generated and transmitted, which trades get executed in what order, etc.  And those aspects of the stock market start to look something like the information commons that Frischmann and his collaborators write about.  Consider, for example, their definition of an information commons: “the institutionalized community governance of the sharing and, in some cases, creation of, information . . ..”  If one of the functions of a stock exchange is to generate information about bids and asks and match those bids and asks to facilitate a trade, then the question how that information is generated is of some importance.  Unlike the subjects of the trade – the stocks – the information about the stock prices and owners is generated cooperatively through the collective efforts of the various actors in the market – traders, market makers, buyers, sellers, and the institutional exchange.  The rules in use specify how the information is to be generated and shared – who has access, what rules govern the production of the information, etc.  Flash Boys make vividly clear how much these factors matter in determining the shape, structure, and, ultimately, the social utility of the market.  To the extent, then, that scholars are interested in examining the workings of the market itself, Ostrom’s framework might provide a somewhat unexpected but quite useful starting point.

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