Evidence-Based Policy Making for Financial Markets: A
Fairness and Efficiency Framework for Assessing
Market Quality

Abstract

We propose an outcomes-based regulatory framework for assessing security market quality that includes measurement proxies for market integrity or fairness as well as market efficiency. Across 21 leading equity markets worldwide, a price impact metric of effective spreads minus realized spreads is 10-fold greater from the most to the least efficient market. Moreover, some metrics of market integrity exhibit an even wider range. The incidence of trading ahead of price-sensitive announcements varies from 0.02 to 0.44 of 1% of total turnover, and cumulative abnormal profit from such insider trading varies from as little as $2,556 to $21 million each security year.