REGULATION OF FINANCIAL MARKETS: TOWARD A FOCUSED APPROACH

Journal of Applied Corporate Finance W I N T E R 2 0 0 2 V O L U M E 1 4 . 4

Regulation of Financial Markets: Toward a Focused Approach by Hans R. Stoll, Vanderbilt University

122JOURNAL OF APPLIED CORPORATE FINANCE

REGULATION OFFINANCIAL MARKETS:TOWARD A FOCUSEDAPPROACH

by Hans R. Stoll,Vanderbilt University*

he Worldwide Web, the cashless society,the cell phone—these are just some ofthe changes that are affecting our dailylives ... and our financial systems. The

with his finger in the dike. But maintaining old dikesand plugging holes as necessary are difficult, costly,and likely to end in failure. The Dutch boy did saveHolland, but that was a fairy tale. In real life, simplyplugging holes in an outmoded regulatory systemwill probably not work.

An alternative approach would be to makegood decisions about what should be enclosed bydikes and what should not. Regulators coulddivert some of the water to flow freely, whilefocusing their energies on containing the remain-der. This new approach to regulation requires adifferent regulatory mindset. Regulators shouldaim to identify and provide necessary regulationrather than continuing to simply expand regula-tory oversight. Implicit in this mindset is the ideathat not everything must be regulated.

This focused approach to regulation wouldseparate what is regulated from what is not. Whereregulated and unregulated markets perform similarfunctions or offer similar instruments, market partici-pants would be able to choose which market to tradein. Investors and bank depositors could play in eitherthe still waters of regulated financial markets or thefree-flowing waters where regulation is absent.While the free-flowing waters may be more danger-ous, participants in those markets will developwatercraft (for example, in the form of insurance orhedging) to help them withstand potential turbu-lence. Other investors, less knowledgeable or lessadventuresome, will choose the still waters behindthe dikes.

*This article is a revision of my plenary lecture at the Multinational FinanceSociety Meeting in Helsinki, Finland, in June 1998. An earlier version appeared inthe Multinational Finance Journal, Vol. 2:2, June 1998.

1. See Charles S. Sanford, “Financial Markets in 2020,” presented at the FederalReserve Bank of Kansas City Economic Symposium, Jackson Lodge, WY, August20, 1993.

trading of financial instruments is increasingly auto-mated and independent of geography. As evidenceof this trend, fully one half of Schwab’s brokeragebusiness comes to it electronically. New issues ofstocks can easily be marketed over the Web. Finan-cial innovation, including what has come to be called“particle finance,”1 is providing new financial instru-ments and contracts to meet every customer need.Derivatives can now be used to create a seeminglyunlimited variety of “virtual” portfolios. Globalizationof markets is a byproduct of the new communicationstechnology and relative political stability. As a matterof technology and communication, it is as easy to tradea security from Finland or Thailand as from New York.Only law and regulation make it difficult.

These developments pose major problems forfinancial regulators. Regulation arose in a simplertime when financial transactions were carried outface to face on an exchange floor or in a banker’soffice—when trading was localized and the varietyof financial instruments was small. Today the task ofregulators is much more difficult. Trading takes placein cyberspace, and the variety of financial instru-ments is limitless. In this high-tech environment,how should regulators cope?

Regulators could try to apply the existing regu-latory scheme to ever more complex financial mar-kets, an approach akin to the proverbial Dutch boy

T

123VOLUME 14 NUMBER 4 WINTER 2002

BASIS OF FINANCIAL REGULATION

Regulation of financial markets rests on thetenet that it protects the public interest by (1)protecting investors and (2) guarding against sys-temic risk.2 With regard to investor protection,regulators maintain that their oversight is justified onthe grounds that investors are uninformed andunskilled. The initial focus, and still the centralelement, of our regulatory system is to solve theproblem of the uninformed investor through com-pany disclosure and transparency of trading mar-kets. Most of us would agree that disclosure providesthe information needed to make rational decisions.

But regulation today goes far beyond disclosurerequirements. Because a growing number of inves-tors are presumed to be unskilled and incapable ofmaking informed decisions, the Securities and Ex-change Commission (SEC) and the CommodityFutures Trading Commission (CFTC) now also re-quire brokers to judge the suitability of an investmentfor their customers. As the late Merton Miller put it,3

we have moved from a free market economy of“caveat emptor to an economy of caveat vendor,”one that imposes responsibility on the seller. Suit-ability may be a reasonable requirement in a formallyestablished fiduciary relationship, but it is less clearthat suitability should apply to arms-length sales offinancial products, particularly sales to corporationsand financial institutions. Why should a broker-dealer be responsible for judging the suitability ofa financial product for a large corporation likeProcter & Gamble or a large governmental entitylike Orange County?

I would answer that there should be limits toregulation. A focused approach would provideinvestor protection in designated markets and secu-rities. Trading in other markets and securities wouldbe at the investor’s risk.

The second basis for financial regulation isconcern about systemic risk. Systemic risk arises ifthe failure of one financial institution causes a run onother institutions and precipitates system-wide fail-ure. Regulation is said to be required becauseindividual institutions do not adequately take ac-count of the external costs they impose on the

financial system when they fail. But almost everyaspect of financial markets, if not daily living itself,involves systemic risk. For example, defaulting onmy home loan has potential systemic effects—thebank might fail, which might cause other banks tofail, and so forth. Clearly there must be limits on theapplicability of this rationale for regulation.

A focused approach to regulation would con-centrate on those aspects of a market that clearlypose systemic risks to the payment system and theintegrity of securities markets. It would leave un-regulated those aspects that are not central toconfidence in the financial system and for which thefree market can provide its own protection.

If it continues on its current trajectory, regula-tion will become inefficient, unwieldy, and toocostly as it attempts to deal with an ever morecomplex financial system. Financial institutions willbe required to justify their actions in terms ofsuitability, risk, and other criteria. Government offi-cials will have to become involved in the details ofbusiness decisions to understand whether aninstitution’s actions are suitable and within thebounds of allowable risk. That a new approach isneeded becomes clear when one examines currentregulatory issues in banking, securities, and futures.

BANK REGULATION

The linchpin of bank regulation is depositinsurance. Deposit insurance prevents runs on banksbecause depositors know their money is safe evenif the bank fails; and, as a consequence, the integrityof the payments system is maintained. However,deposit insurance introduces well-known moralhazard problems: banks take greater risks anddepositors lose the incentive to monitor banks’ risktaking. The regulatory response is to substitutegovernment monitoring for private monitoring. Regu-lators inspect banks and establish capital require-ments that reduce the risk of bank failure to anacceptable level.

Insured deposits are only a small fraction of theassets of the major banks, but capital requirementsand bank inspection apply to even the largest banks.If inspecting banks and setting capital requirements

2. George Stigler argues that regulation only serves the interests of theregulated. I assume that regulation is in fact intended to serve the public interest.See George Stigler, “The Theory of Economic Regulation,” Bell Journal ofEconomics and Management Science, Vol. 2:1 (1971), pp. 3-21.

3. Merton Miller, Merton Miller on Derivatives (New York: John Wiley, 1997),p. 24.


were easy, this all-encompassing regulatory over-sight would be no problem.4 But establishing the“correct” capital requirements is a difficult task—technically difficult, conceptually difficult, and mana-gerially difficult. To do a good job, regulators wouldhave to become managers. In recognition of thesedifficulties, regulators have allowed banks to usetheir own internal models to determine the amountof capital necessary to protect against market risk.The proposed new Basel Accord (of January 2001)would permit a similar approach—one based oninternal ratings—for determining more precisely thecapital necessary to protect against credit risk. Butthese internal approaches do not really solve theproblem because the regulator still has to assess themodels. To properly inspect and understand com-plex internal credit risk models is no mean task. Infact, the typical bank examiner simply multiplies bythree the capital requirements dictated by a bank’smodel in order to “be on the safe side.”

Traditional comprehensive regulation is costlyin several ways. First, it tends to result in more thanthe optimal amount of capital since, for the regulator,the cost of too much capital is less than the cost ofan embarrassing financial failure. Second, the cost ofoversight and inspection is great. To properly regu-late a complex modern bank, the bank examinermust be as sophisticated and have as much informa-tion as the bank manager. Third, government regu-lation reduces incentives for (arguably more effi-cient) monitoring by the private sector.

The solution to the regulation of ever morecomplex modern banks is a focused approach.Regulation should concentrate on the objective ofprotecting insured deposits and thereby maintainingconfidence in the banking system. The focusedapproach to bank regulation was proposed over 50years ago by Henry Simons,5 and has been referredto as the “narrow” bank approach. Under Simons’approach, the bank would be required to maintainspecific 100% collateral against insured deposits.Operationally, this could be accomplished by settingup a separate subsidiary for the insured deposits.Uninsured deposits and other bank activities wouldnot have the same protection. The market woulddetermine the adequacy of the collateral behind

uninsured deposits, just as it now does for uninsuredmoney funds. Depositors could choose insuredaccounts or uninsured accounts, just as they dotoday with many other types of investments.

A corollary of the focused approach to regula-tion is that the “too big to fail” doctrine must beabandoned.6 If the uninsured segment of a bankwere allowed to fail, depositors and lenders to largebanks would have the incentive to monitor theinstitution. Regulators can help by requiring morecomplete accounting and disclosure.

SEC REGULATION

The SEC regulates the issuance of securitiesunder the Securities Act of 1933, and it regulatesbroker-dealers and the trading of outstandingsecurities under the Securities and Exchange Actof 1934. Three regulatory issues dealing with thescope of SEC regulation have been in the newsrecently. One deals with capital requirements, asecond with initial offerings, and a third with thetrading of micro-cap stocks.

SEC Capital Regulation

As is true of banks, broker-dealer regulationincludes a heavy dose of capital regulation. But theSEC is still in the Dark Ages. Its capital requirementsare established on an asset-by-asset basis, not on aportfolio basis, with inadequate recognition of thebenefits of diversification. Such an approach may beappropriate for a simple broker that acts as an agentfor customers wishing to trade stocks and bonds, butit is completely inadequate for a sophisticated invest-ment bank with large positions in assorted financialinstruments (many of which did not even exist whenthe capital regulations were written). Under SECcapital requirements, for example, swaps are consid-ered unsecured loans and are subject to a 100%capital requirement (calculated on their nominalvalue). Furthermore, because of the SEC’s asset-by-asset approach, there is no offset for hedges. Underthese regulations, it is prohibitive for SEC-registeredbroker-dealers to do any business in derivatives, andcompanies have had to establish subsidiaries outside

4. In a recent paper, Clifford Ball and I compare regulation of different financialinstitutions and examine the complications of the new world of high-tech finance.See “Regulatory Capital of Financial Institutions: A Comparative Analysis,”Financial Markets, Institutions, and Instruments, Vol. 7 (1998).

5. See Henry C. Simons, Economic Policy for a Free Society (Chicago:University of Chicago Press, 1948).

6. The Federal Reserve Bank of Minnesota has proposed steps toward theelimination of the “too big to fail” concept in “Fixing FDICIA: A Plan to Addressthe Too-Big-to-Fail Problem,” 1997 Annual Report (March 1998).


of SEC jurisdiction. Subsidiaries can escape SECregulation if they are offshore or if they do businessonly in financial instruments that the SEC does notconsider to be “securities,” such as swaps.

In December 1997, however, the SEC proposedto bring these heretofore unregulated subsidiariesunder a modified—and for the moment, voluntary—regulatory scheme sometimes termed “broker-dealer-lite.”7 The modified regulations would apply to OTCderivative subsidiaries that deal only with largeinstitutional counterparties. The thought that thesubsidiaries need not be regulated at all apparentlydid not occur to the SEC. The broker-lite proposalhas also produced a return salvo from the Com-modity Futures Trading Commission, which thinksthat maybe it should be regulating these deriva-tives subsidiaries.

The SEC has succumbed to the belief thateverything should be regulated, even if only lightly.An alternative would be to exempt from regulationactivities that are not central to the SEC’s mission.Consider, for example, capital regulation. The cen-tral mission of capital regulation is to protect indi-vidual accounts insured by the Securities InvestorProtection Corporation (SIPC). A focused approachto SEC capital regulation would parallel the narrowbank approach. It would require the portion of thebroker-dealer holding insured customer accounts tohave solid collateral and to be transparent. Theremaining activities of the broker-dealer would beunregulated or subject to broker-dealer “lite” regu-lation, and firewalls between the regulated segmentand other segments would be established.

Offshore Website Offerings

Securities offered for sale in the U.S. are subjectto registration with the SEC under the 1933 Act. Butwhat about securities offered outside the U.S. onWeb sites originating outside the U.S. but easilyaccessible from within the U.S.? In a recent “interpre-tation,” the SEC advised that Web offerings would besubject to registration when they are “targeted” topersons in the U.S.8 To avoid U.S. registration, theWeb site is required to post disclaimers and to takeactions to ensure that no sales are made to U.S.

citizens. The interpretation thus imposes require-ments on foreign issuers in jurisdictions outside theU.S.9 It also leaves unclear the liability of an issuerthat sells securities to a U.S. citizen who evades thelaw by claiming to be a foreigner.

The SEC is in the difficult position of trying toseal off the U.S. from the flood of foreign offeringsavailable over the Web or otherwise. Aside from thefact that this looks a lot like putting a finger in thedike, why is it so important to prevent an Americanfrom buying an unregistered security? An alternativeapproach would be to declare that the offering is notregistered and to let investors participate if they wish.This procedure has been implemented, in part, foraccredited investors who are allowed to purchaseofferings of securities that do not meet the full SECregistration requirement. It would not be a disasterto permit all investors the same right by creating twocategories of new issues—registered and non-registered. The SEC would focus on the registeredissues while other, unregistered issues would re-ceive a financial health warning. A Web offeringcould be registered or not. The issuer could choose.

The response from regulators to such a pro-posal will be that individuals cannot intelligentlydecide between registered and unregistered is-sues—that it is the obligation of the SEC to protectinvestors, whether they want the protection or not.Ultimately, the resolution of this issue depends onhow much responsibility should be given to indi-vidual investors and how much protection theywant. If investors prefer the protection of regulatedofferings, they will participate only in the regulatedmarket and the unregulated market will dry up.

Micro-Cap Stocks

Micro-cap stocks are very small companies thatappear and disappear on a moment’s notice. Theyare quoted on the “pink sheets” and traded “byappointment” with a market-maker. In response toabuses in the trading of micro-cap stocks, the SEChas recently proposed new obligations for marketmakers in such stocks.10 These obligations requirethe market-maker to read and understand the finan-cial statements of the company in which they make

7. SEC Release No. 34-39454, “OTC Derivatives Dealers,” December 1997.8. SEC Release No. 33-7516, “Statement of the Commission Regarding Use of

Internet Web Sites to Offer Securities, Solicit Securities Transactions or AdvertiseInvestment Services Offshore,” March 23, 1998.

9. The interpretation imposes even stricter standards on U.S. companies thatoffer unregistered securities offshore.

10. SEC Release No. 34-39670, “Publication or Submission of Quotationswithout Specified Information,” February 17, 1998.

A focused approach to regulation would separate what is regulated from what is not,and would provide investor protection only in designated markets and securities.

Trading in other markets and securities would be at the investor’s risk, and marketparticipants would choose which markets to trade in.


a market. On the one hand this requirement seemsinnocuous. Why should market-makers not be famil-iar with the stocks they quote? On the other hand, itis a clear set-up for a legal suit by the first investorwho buys a micro-cap stock that subsequently tanks.The result is likely to be that micro-cap stocks will notbe quoted at all.

Would it not be simpler to inform investors thattrading in micro-caps is done at their own risk? Micro-caps that provide the necessary information andregister with the SEC would be traded in regulatedmarkets. Those that do not would be quoted in thepink sheets, without warranty and with a disclaimerthat they are not registered.

In summary, a focused approach to SEC regu-lation would (1) set up a separate subsidiary forinsured customer business that would be subject tocapital requirements and other regulations and thatwould leave the rest of the broker unregulated orsubject to “lighter” regulation; (2) let issuers choosewhether to meet registration requirements and letinvestors decide whether they wanted to participatein the regulated or unregulated new issue markets;and (3) free certain secondary markets from SECregulation, leaving it to individual companies todecide whether they wish their securities to trade ina regulated or an unregulated secondary market.

DERIVATIVES REGULATION

Consider now the third area of regulation—derivatives, which are regulated by the CommodityFutures Trading Commission (CFTC). Financial de-rivatives, introduced in the late 1970s and early1980s, upended a previously staid regulatory worldin which the Commodity Exchange Authority (CEA),the CFTC’s predecessor, regulated agricultural com-modities, the SEC regulated securities and securitiesfirms, and the banking agencies regulated banks.With the CEA Act of 1974, the backwater of agricul-tural commodity regulation suddenly became theCFTC, responsible for all futures contracts—a play-ing field that, in principle, involved every type offinancial contract, including the major financialinnovations of the last 20 years. The Act did notdefine futures, but gave the CFTC exclusive jurisdic-tion over them and required that they be traded onan organized futures exchange. At the last minute,

the Treasury, spotting the CFTC’s broad mandate,inserted an amendment (known as the TreasuryAmendment) that excluded futures on currenciesand government securities from CFTC jurisdiction.

The CEA Act of 1974 turned out to be a recipefor legal uncertainty, to put it mildly.11 It generateda turf battle among the SEC, the CFTC, and thebanking authorities and left in legal limbo the OTCderivatives market. If implemented, the CFTC’s au-thority could easily kill off a host of new products.If the CFTC were to designate an OTC swap contractas a futures contract (which it is), the CFTC wouldhave exclusive jurisdiction, and the product wouldbe illegal unless it were traded on an approvedexchange. The CFTC’s broad authority is the antith-esis of focused regulation.

CFTC Chairman Wendy Gramm used her au-thority under the 1992 Futures Trading Practices Actto exempt swaps and hybrids from CFTC jurisdiction.The move to clarify and narrow CFTC jurisdiction,however, suffered a setback with the occurrence ofseveral “derivatives disasters” in the mid-1990s. Forexample, in the Bankers Trust-Gibson case, theCFTC promulgated the interesting notion that Bank-ers Trust was a de facto commodity advisor and hadviolated its fiduciary obligations to Gibson, despitethe fact that the security in the case was a swap andthus exempt from CFTC regulation. In theMetallgesellschaft (MG) case, the CFTC ruled thatMG had entered into illegal futures and optionscontracts with its customers—illegal because theywere entered into outside an exchange. CFTC activ-ism culminated in May 1998 with a concept releaseasking whether the CFTC’s jurisdiction over OTCderivatives markets was sufficient. The release causednail-biting among securities firms and banks and alsoshook up the likes of Fed Chairman Alan Greenspanand former Treasury Secretary Robert Rubin, whofeared that their turfs would be invaded by the CFTC.

A focused approach to futures regulation wouldincrease the clarity and certainty in what is a murkyand choppy regulatory sea. The principle is simple:Congress should specify which derivatives marketsreally need to be regulated and which do not. Areasonable approach would be for the CFTC toregulate futures trading on organized futures ex-changes and to leave unregulated other futurestrading such as that in the OTC market. The afore-

11. The legal uncertainty present in futures regulation is documented inWendy Gramm and Gerald Gay, “Scams, Scoundrels, and Scapegoats: A Taxonomy

of CEA Regulation Over Derivatives Instruments,” The Journal of Derivatives, Vol.1:3 (1994).


mentioned Treasury Amendment reads so as toexclude “transactions in foreign currency, ... govern-ment securities, or mortgages..., unless such transac-tions involve the sale thereof for future deliveryconducted on a board of trade.” Such an approachwould not be unreasonable for all futures. A modi-fication might be to allow markets to choose to beregulated by the CFTC or another regulator. Underthis approach, the CFTC’s exclusive jurisdiction overfutures would be eliminated because certain con-tracts recognized to be futures contracts would betraded outside of organized exchanges.

The Commodity Futures Modernization Act,passed by Congress in December 2000, moves in thedirection of focused regulation by creating exemp-tions from CFTC regulation for certain types offutures markets. While “designated contract mar-kets” are subject to complete regulation and “deriva-tives transaction facilities” are subject to an interme-diate level of regulation, certain markets are exemptfrom CFTC regulation. However, the CFTC is respon-sible for monitoring these markets for fraud. The Actalso gives up the exclusivity doctrine, at least for thenewly approved futures on individual stocks, byproviding that the CFTC’s regulatory authority beshared with the SEC.

ALTERNATIVE REGULATORY APPROACHES

Financial regulation in the U.S., and probablyaround the world, has evolved largely by taking aninstitutional approach. Banks, brokers, and insur-ance companies have been separately regulatedeven as the overlap of their businesses has increased.One of the benefits of the institutional approach isthat regulators come to understand the industry theyregulate. Alan Greenspan has often argued that theFederal Reserve needs the authority to examine thelargest banks so that it can be current on how bankswork and how monetary policy affects them. Thedrawback is that regulators may become captives ofthe industry.

The functional approach to regulation orga-nizes regulation by regulatory function or by the

economic function of the financial product. A goodexample of this approach is a proposal by theChicago Mercantile Exchange for a restructuring offinancial regulation.12 The CME proposal wouldconsolidate the banking, securities, and derivativeregulatory agencies under one cabinet level depart-ment that would be organized into eight functionaldivisions: capital adequacy, disclosure, pooled funds,debt and equity markets, derivatives markets, bank-ing and insurance, customer insurance, and con-sumer protection. The functional approach is said tobe more efficient and to reduce jurisdictional over-lap. The drawback is that it is difficult to implementbecause it requires major changes in jurisdiction.

The competitive approach to regulation calls fornon-exclusive regulation, which gives investors andfinancial companies alternatives. Insofar as the insti-tutional approach leads to overlapping jurisdictions,it is a competitive approach. For example, there iscompetition between the SEC and CFTC in the areaof equity futures. Yale legal scholar Roberta Romanorecently proposed a system of competitive stateregulation for a few components of federal securitieslaw (registration of securities and corporate disclo-sure).13 A company could choose whether to beregulated by a federal regulator or by a particularstate. The proposal requires reciprocity among thelegal jurisdictions so that once the firm chooses aregulator, that regulator’s authority is recognized inall jurisdictions. The benefits of the competitiveapproach are that firms would be able to choose theirregulator, thereby creating a market for regulation.(The flight of investment advisory firms offshore andthe use of exemptions from regulation, such as theaccredited investor exemption, indicate the burdensof some existing regulation and the benefits ofhaving alternatives.14) Romano’s proposal wouldalso translate nicely into the international arena.15

The focused approach that I have espousedthroughout this article is consistent with any of theabove frameworks, but it fits in best with thecompetitive approach because it gives market par-ticipants the ability to choose not only amongregulators but also between regulated and unregu-

12. See Edward Fleischman (presenter), “Chicago Mercantile Exchange: AModel for Federal Financial Regulation,” in Global Equity Markets, edited by RobertSchwartz (New York: NYU Salomon Center, Irwin Professional Publishing, 1995).

13. Roberta Romano, “Empowering Investors: A Market Approach to Securi-ties Regulation,” Yale Law Journal, Vol. 107:8 (1998).

14. Alan Greenspan made the same point: “Migration of activity fromgovernment-regulated to privately regulated markets sends a signal to government

regulators that many transactors believe the costs of regulation exceed thebenefits.” See his article entitled “The Role of Regulation,” Risk, Vol. 10:4 (1997),p. 18.

15. Roger Koppl pointed out to me that Adam Smith had noted with approvalthe existence of competition among different British courts. Smith noted that“…each court endeavoured, by superior dispatch and impartiality, to draw to itselfas many causes as it could.” (Wealth of Nations, Book V, Ch. 1, part II.)

The focused approach that I have espoused throughout this article is consistent withany of the above frameworks, but it fits in best with the competitive approach

because it gives market participants the ability to choose not only among regulatorsbut also between regulated and unregulated activities.


lated activities. The focused approach simplifiesregulation, and it recognizes that not everythingneed be regulated. The problem today is less how toregulate but how much to regulate. The focusedapproach emphasizes the need to specify clearlywhat ought to be regulated and what not.

CONCLUSION

As financial markets continue to become moreglobal, attempts to impose a single regulatory frame-work are likely to fail. As a practical matter, world-wide functional regulation is simply not feasible. We

are likely to to see continued institutional regulationalong with competition among different legal juris-dictions around the world. The task for regulators isnot to form one massive worldwide regulatory cartelbut rather to enter into reciprocity agreements underwhich regulation by any one of many legal jurisdic-tions will be acceptable. In this more complex andmore competitive environment, focusing regulationon those aspects of the markets where it is mostappropriate will make life easier not only for firmsand investors but also for the regulators. In sum, theregulatory system should be institutional, competi-tive, and above all, focused.

HANS STOLL

is the Anne Marie and Thomas B. Walker Professor of Financeand Director of the Financial Markets Research Center atVanderbilt University’s Owen Graduate School of Management.

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REGULATION OF FINANCIAL MARKETS: TOWARD A FOCUSED APPROACH