This means a greater regulatory burden for all and greater inconvenience to market participants, and possibly implications for the legal and institutional arrangements for regulation. Fourth, this approach may involve tighter rules for the markets. The critics may again say that this will further erode market freedom. But should we be so dogmatic? In any case, it is all a matter of degree. In the end, it is the public interest that counts. Is there, for example, anything wrong in restrictions against the holding of large dominating positions in any particular market, or against the taking of market moving activities? The purpose of a market is price discovery. There is no objection for buying low and selling high, and I would wish anybody who is attempting that the best of luck. But there is no legitimate reason for anybody to be operating in a market in a manner that has the sole aim of moving the price in order to make a profit. Tighter rules aside, it is interesting, and indeed slightly worrying, to note that stronger forms of restrictions and controls have been gaining currency among some monetary authorities or regulators in the past two years. These range from restrictions on domestic credit to some forms of exchange controls. This response is quite understandable and may be a reflection of the failure of the international financial architecture to accommodate the needs of small markets. But it is also regrettable, given the enormous benefit that international capital has brought to the region.
Yet another ‘G’ - the G20 - is in the process of being established. Hong Kong’s significant voice on the subject means that some of us have to be travelling and attending international meetings all the time. Yet our extensive involvement is necessary if the plight of the small open markets, particularly those that are international financial centres, is to be adequately heard and taken into account in the reform of the international financial architecture. BIS Review 120/1999  4  International reform Our stance in these discussions is that we support the free flow of international capital but that there is a need to limit its destabilising influence on financial markets, particularly those in small open economies. And specifically we point to the two interrelated aspects of excessive volatility and inadequate transparency that need to be addressed. Volatility is largely the result of herding behaviour, which is in turn the result of the lack of information on which market participants can make rational decisions. All this is made a lot worse when, because of the lack of market information, particularly in the case of the over-the-counter markets, market concentration develops, whether consciously or unconsciously. And market concentration has a tendency to lead to market failure and possibly market manipulation. The international solutions we put forward, therefore, are greater disclosure and, where applicable and practicable, enhanced regulation. It is in our reference to market manipulation that I think we touched a few raw nerves, particularly against the background of the controversial action we took last summer.