Speech by SEC Staff:
"Markets of All Time and in All Places"

by

Ethiopis Tafara

Director, Office of International Affairs
U.S. Securities and Exchange Commission

SEC 2006 International Institute for Securities Market Development
Washington, DC
April 17, 2006

Thank you, Malika.

It is my great pleasure to welcome you to the SEC's 2006 International Institute for Securities Market Development. This is the Institute's 16th year, and I am pleased that it is also our largest to date, with over 170 delegates representing 72 countries. Over the next two weeks, you will have a chance to listen to some of the most well-respected members of the financial, regulatory and law enforcement communities from not just the United States but from around the world. But perhaps most importantly, we will all have a chance to learn from each other. One of the little secrets of this Institute is that we at the SEC use it as a tool to learn from you — to draw on your own experiences as to what does and doesn't work in a given regulatory, legal or cultural context.

Today, when we think about global capital markets, we tend to think of the world's great financial centers — New York, London, Tokyo, Hong Kong, Frankfurt, etc. But this focus on the largest, most modern markets, I believe, misses an important point to keep in mind over the course of this Institute. This point is that each and every market is both similar and unique — similar in that they all respond positively to certain fundamentals, but unique in the environment and tradition in which they develop and prosper. To turn a famous historian's quotation on its head, "our eyes should survey the world, but our feet should be firmly planted in our country." For example, market capitalization of equities traded on the US capital market now stands at approximately $19 trillion. This is a huge number. But its size obscures the simple fact that the US capital market is a market. And even as capital markets go, ours is far from the oldest. Markets, in one form or another, have existed in every society since the dawn of recorded history. And, despite their size and complexity, the market fundamentals of today are exactly the same as those that permitted markets to function thousands of years ago in ancient Sumeria, Egypt, Phoenicia, and China, in the great Olmec and Incan cities in the Americas and in the Bantu, Swahili and Semitic cities in Africa.

These fundamentals are simple. They include a place where those interested in buying something can meet those interested in selling that thing. This place can be a simple bench under a buttonwood tree, which is how the New York Stock Exchange got its start more than 200 years ago, it could be a modern trading floor, or it could be the virtual space of the Internet.

Second, there must be property rights. Buyers and sellers must have some legal right to control and transfer the items being traded. In ancient times, these rights were recognized by custom or possession; today, they usually involve laws. Either way, without these rights, markets cannot exist.

Third, and most importantly, markets require trust. Trust is the lubrication that keeps the wheels of a market from grinding to a halt. It is the faith that a buyer is buying what he or she expects, and the faith that the seller will receive the payment promised at the time promised. And this faith has never been blind. Without this basic trust, no market in the world, no matter how technologically sophisticated, will succeed.

In the diamond markets of New York and Amsterdam, trust is based on ethnicity, religion and the personal interaction of a handful of traders. The markets work because of reputation and the small community that makes up these markets. With the anonymous trading that characterizes modern capital markets, this personal trust, perforce, has been replaced by a surrogate — securities laws, regulations, and their vigorous enforcement by securities regulators and law enforcement agencies with the powers and resources necessary to do the job.

You are probably attending this conference because, at a ripe old age of 72, the SEC is among the oldest securities regulators in the world, with a great deal of experience as regulators go. But I would like to point out that the SEC, despite its age, is much younger than the markets it regulates. Stock exchanges in the United States existed without a federal regulator — indeed, without much regulation of any sort — for nearly 150 years before the SEC was created. I suspect that this is the case in most of your jurisdictions as well. My point is that markets are organic. They often spring up on their own, sometimes in seemingly the least likely of places. Good regulations are not the fuel that drives these markets, or the foundations upon which they are built. Rather, good regulations — and good regulators — are more like the oil in the gears that helps the machinery run more smoothly. Good regulation is vital to a good market, but good regulation, alone, is not sufficient. The regulation must mesh with the market and market culture that exists. It cannot recreate the market in its own image.

The reason I say this is because, as you listen to the invited speakers over the next two weeks, I hope that you keep in mind that the examples they give will be the successes and failures of a particular jurisdiction with a particular history. These are extremely valuable lessons, and I'm sure that you will see parallels in your own jurisdiction in most cases. But because markets are organic and because they develop out of unique circumstances, the lessons to draw from these successes and failures are the broader principles involved. How these broader principles apply in your own jurisdictions, with your own markets, is something that you, and your colleagues at home, must determine. Laws, regulations and procedures cannot be imported and applied as easily as computer systems and software. It is not an easy task, but it is a vital one.

Our markets today are the engines that drive our economies. They provide the capital that fuel job-creation, and better the lives of millions around the world. They are unique and precious, but they all share in their need for certain fundamental things in order to prosper. Foremost among these, there must be trust, and we regulators and law enforcement officials are the guardians of this trust. We owe it to our fellow citizens to make sure that the fundamentals of our markets are strong.

Thank you and welcome to Washington.

http://www.sec.gov/news/speech/2006/spch041706et.htm