Evaluation Cultures, Organizational Logics, and the Limits of Financial Regulation

On 15 January 2015, the Securities and Exchange Commission settled a case against UBS, the global investment bank, for practices associated to the operation of its 'dark pool', a private electronic trading venue that had been designed to give certain users an illegal competitive advantage over the general marketplace. As the SEC noted, UBS's dark pool contemplated a type of hidden order that, privy to only a small group of sophisticated investors, allowed outbidding regular users of the trading system’s order book. Notably, it took the SEC six years to act on UBS's dark pool, despite having been developed in what is arguably one of the most intensely disclosed marketplaces in the world. Why did the SEC fail to act in such critical issue of market structure? This paper addresses the regulatory practices of the Securities and Exchange Commission over the course of the twentieth century. Using computer-aided text analyses of 7500 speeches by the SEC’s commissioners (including the evolution of ngrams and topic models within the corpus), this paper identifies distinct patterns of term usage that are used as proxies for changing institutional cultures of evaluation at the SEC in its approach to controversies about the architecture of American finance. Combined with data on the professional backgrounds of SEC commissioners, oral histories, published histories, and congressional debates on financial regulation, these pieces of information allow reconstructing the organizational logics that characterized the work of the Securities and Exchange Commission in relation to discussions of market regulation. As is argued in the paper, the dominance of cultural evaluation frameworks and professional backgrounds within economics, law, and accounting hindered the ability of the SEC to act in regulating highly technical controversies of market structure and market technology. While such evaluation culture spoke to the concerns of the SEC’s New Deal origins, it become an obstacle in resolving technical controversies about the politics of fairness and equality in American finance.