Capital Markets Regulation Course (Spring 2012)
Merritt B. Fox
This course, a joint offering of the Law School and the Business School, concerns the regulation of capital markets: the New York Stock Exchange, NASDAQ and the wide variety of other institutions devoted to the trading of securities. Capital markets perform important social functions: providing liquidity for investors and incorporating information into prices, which in turn serve as vital guides to real economic activity. The effectiveness with which capital markets perform these functions and their costs of operation are determined in significant part by the rules governing the persons who operate, and trade in, these markets.
The course will begin with a consideration of major domestic and transnational capital market institutions. It will then address the economic theory that explains how capital markets operate and the incentives that motivate their various players. These beginning segments lay the groundwork for a more informed discussion of the substantive law that governs capital markets. Specific regulatory areas to be considered include the rules relating to (1) transparency: who knows (and when) the prices at which securities are being offered and sold (the "ask quotes") and the prices at which actual trades occurred, (2) a broker's execution of a customer's orders, (3) dealers transacting directly with retail customers, (4) procedures to assure that parties to an executed trade actually perform (clearance and settlement), (5) specialists as auctioneers and specialists and market makers buying and selling shares for their own account, (6) trading system alternatives to the NYSE and NASDAQ, (7) transactions by U.S. residents on foreign exchanges and the globalization of securities trading, and (8) trader behavior including manipulation, short selling and insider trading.
By the end of the course, students should be equipped to analyze seriously important law and public policy issues generated by such topical phenomena as flash trading, dark pools, short selling, financial transaction taxes and cross border securities exchange mergers.
The course, with its focus on persons who operate or trade in capital markets, should be distinguished from Securities Regulation, which is devoted primarily to the regulation of the behavior of issuers and their agents in connection with the primary offering and secondary trading of their securities. This course was previously titled Law and Economics of Capital Markets.