Insider Trading, Chinese Walls, and Brokerage Commissions: The Origins of Modern Regulation of Information Flows in Securities Markets

Abstract

This Article examines the emergence of modern regulation of information flows in securities markets in the form of restrictions on insider trading and Chinese Walls within financial intermediaries during the 1960s and early 1970s. It is argued that these regulatory developments can be traced to the demise of the fixed brokerage commissions regime on the New York Stock Exchange and other national securities exchanges and the corresponding use of inside information by brokers as a means of competing for brokerage revenues. In fact, the overall enforcement program of the SEC, which led to insider trading regulation and the creation of Chinese Walls, was strongly influenced by the existence of the fixed brokerage commissions regime and the related concern about the representation of financial institutions on corporate boards. This Article also examines the evolution of the fixed brokerage commissions regimes in the United Kingdom and Japan and argues that such price controls strongly influenced insider trading practices and the emergence of the regulation of information flows in these countries.