How should regulation of exchanges work?
The most important intuition in regulation of exchanges is to view the exchange as a manufacturer of liquidity services. If exchanges do this well, they will get satisfied customers. Exchanges that fail to do this well will fail to get business and go bankrupt. In India we have seen numerous industries and services where competition and the steady process of entry and exit have proved to be a great success in producing high quality and low price. The area of trading services is no exception. The key role for public policy is to keep entry barriers low and therefore keep the competitive pressure upon the incumbents high. It should be easy to start new exchanges; even for business houses to start exchanges. It should be easy (say) for CBOT to come to India and start an exchange. That will serve to keep up competitive pressure and steadily improve the services and costs that end-users, the investors, face.
