LAW 388 - Broker-Dealer and Exchange Regulation

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This course concerns financial-instrument markets and their regulation. Its main focus is on the secondary market for public-company stock (namely, the New York Stock Exchange, NASDAQ, and the wide variety of off- exchange trading platforms in existence today). These 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 these markets perform these functions and their costs of operation are determined in significant part by the rules governing exchanges, broker-dealers, and market makers. The course will begin with a consideration of major domestic capital market institutions. It will then address the economic theory that explains how these markets operate and the incentives that motivate their various players. This part of the course focuses on market-microstructure and finance theory. These beginning segments lay the groundwork for a more informed discussion of the substantive law that governs the markets, which takes place during the second half of the course. In that second half, 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 “bid” and “ask” quotes) and the prices at which actual trades occurred (transaction data), (2) brokers duties with respect to execution of customer orders, (3) dealer rules for transacting directly with retail customers, (4) trading system alternatives to the NYSE and NASDAQ, (5) trader behavior including manipulation and short selling.The course, with its focus on persons who operate or trade in these capital markets as well as the market structure itself, should be distinguished from Securities Regulation, which is devoted primarily to the regulation of the behavior of the firms that issue securities and their agents. The course should be of use for students who plan on pursuing legal work relating to various financial-services industries. More generally, it will provide value to students who intend to work in the corporate, securities, and financial industries (or in the regulation of the same through the Securities and Exchange Commission, the Commodities Futures Trading Commission, the Financial Industry Regulation Authority (Finra), various state AG offices, among others).