Capital Markets Regulation

This course, a joint offering of the Law School and the Business School, concerns the regulation of capital markets - the markets that provide financing for businesses through stocks, bonds, and other financial instruments. The functioning of capital markets largely takes place through the national stock exchanges, such as the New York Stock Exchange, NASDAQ, and BATS, and through so-called dark pools, internalization, and other forms of over-the-counter trade. These markets serve vital social functions, including providing liquidity for investors and incorporating information into prices, which in turn serve as critical guides for the real economy. The ability of capital markets to perform these functions is importantly shaped by the rules governing the persons who operate, and trade in, these markets.

The course will begin with a consideration of the major domestic capital market institutions. It will then address the economic theory that explains how trading and 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. In particular, we will consider (1) the regulation of market structure, including the information available to various market participants, the rules governing the nature of trade, and the variety and rules of trading venues; (2) the regulation of broker-dealers, who intermediate trading, including their legal duties and regulatory structure; (3) various controversies regarding the modern stock market, including dark pools and high-frequency trading; and (4) the regulation of traders, including manipulation, short-selling, and insider trading.

By the end of the course, students should be equipped to analyze with sophistication important law and public policy issues, such as high-frequency trading, dark pools, short-selling, financial transaction taxes, and securities market structure. The class is a blend of statutory and case law, economics, and the consideration of topical issues. It should be of value to any student interested in a career involving the capital markets, securities, or with an interest in the functioning and social value of markets.

This course focuses on capital markets and trading, in contrast to Securities Regulation, which primarily concerns the regulation of the issuers of stocks and bonds, and their agents, in connection with the primary offering and secondary trading of securities.