3

Syllabus
Preliminary Caveat: The dates provided here are based on the pace that we anticipate. If
variations from this schedule are needed, they will be noted in class

I.

The Institutions & Economics of Securities Markets

The course will begin with a survey of the different types of securities markets,
the persons who participate in them, and the fundamental mechanics of their
operation. The social functions of securities markets providing investors with
liquidity, allocating risk, and aggregating information through pricing will be
considered followed by an exploration of how markets perform these functions,
i.e., market microstructure analysis. The role played by regulation will be
introduced by case studies of markets that have failed and disappeared.
A.

B.

C.

Class #1 Tuesday, Sept. 3

1.

Course Outline

2.

Larry Harris, Trading and Exchanges: Market Microstructure for

Practitioners, Oxford University Press 2003 Chapter 1 (Introduction)

3.

Larry Harris, Trading and Exchanges: Market Microstructure for

Practitioners, Oxford University Press 2003 Chapter 2 (Trading Stories)
(only read pp. 11-22; do not read past 2.6 at the bottom of p. 22)

Class #2 Thursday, Sept. 5

1.

Freidrich Hayek, The Use of Knowledge in Society, American Economic

Review, XXXV, No. 4, pp. 519-30 (September 1945)

2.

Larry Harris, Trading and Exchanges: Market Microstructure for

Practitioners, Oxford University Press 2003 Chapter 9 (Good Markets)

3.

Merritt B. Fox, Artyom Durnew, Randall Morck, Bernard Yeung Law,

Share Price Accuracy and Economic Performance: The New Evidence,
102 Mich. L. Rev. 331 (2003) (Excerpt)

Class #3 Tuesday, Sept. 10

1.

Paul G. Mahoney, Information Technology and the Organization of

Securities Markets, Brookings-Wharton Papers on Financial Services
(2002)

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2.

D.

Class #4 Thursday, Sept. 12

1.

E.

I.

J.

Larry Harris, Trading and Exchanges: Market Microstructure for

Practitioners, Oxford University Press 2003 Chapter 27 (Floor Versus
Automated Trading Systems)

Class #7 Tuesday, Sept. 24

1.

H.

Larry Harris, Trading and Exchanges: Market Microstructure for

Practitioners, Oxford University Press 2003 Chapter 14 (Bid/Ask
Spreads)

Class #6 Thursday, Sept. 19

1.

G.

Larry Harris, Trading and Exchanges: Market Microstructure for

Practitioners, Oxford University Press 2003 Chapter 5 (Market
Structures) and Chapter 19 (Liquidity)

Class #5 Tuesday, Sept. 17

1.

F.

Larry Harris, Trading and Exchanges: Market Microstructure for

Practitioners, Oxford University Press 2003 Chapter 8 (Why People
Trade)

Previous class readings continued

Class #8 Thursday, Sept. 26

1.

John C. Coffee, Jr., Privatization and Corporate Governance: The Lessons

from Securities Market Failure, published at Chapter 7 of Merritt B. Fox
and Michael A. Heller, Corporate Governance Lessons from Transition
Economy Reforms, Princeton University Press, pp. 272-314

2.

Stijn Claessens, Simeon Djankov, and Daniela Klingebiel, Stock Markets

in Transition Economies, Financial Sector Paper No. 5, The World Bank
(September 2000)

3.

NASDAQ of the North (Dec. 2, 1999)

4.

Vikas Bajaj and Stephen Labaton, Big Risks for U.S. in Trying to Value
Bad Bank Assets, New York Times (Feb. 2, 2009)

Class #9 Tuesday, Oct. 1

1.

MIDTERM EXAM FOR FIRST 50 MINUTES OF CLASS

2.

Previous class readings continued

Class #10 Thursday, Oct. 3

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1.

II.

Previous class readings continued. You may wish to begin reading the
large assignment for Class #11 at this time.

The Regulation of Market Structure

The rules by which a securities market operates are important determinants in
how well it performs its various social functions, its real costs of operation, who
among the participants the various types of traders and market actors such as
brokers, dealers and exchanges profit and who do not, and the capacity of
market institutions to innovate to perform these functions better and/or at less real
cost. One such set of rules relates to transparency: who knows (and when) the
prices at which securities are being offered and sold (bid and ask quotes) and
the prices at which actual trades occurred. A second set concerns execution by
brokers of customer orders: the brokers best execution and fiduciary duties to its
customer, the abandonment of fixed commissions, rules covering the special
situation where a broker matches its own customers buy and sell orders
(internalization), and the receipt by brokers of payment to steer their
customers order flow to a particular market. A third set of rules concerns the size
and disclosure of markups when a customer directly buys from, or sells to, a
dealer rather than through a broker. A fourth set of rules concerns procedures to
assure that the parties to an executed trade actually perform their respective
contractual obligations (clearance and settlement and broker and exchange
guarantees of performance).
A.

Class #11 Tuesday, Oct. 8

1.

Hans R. Stoll, Electronic Trading in Stock Markets, Journal of Economic

Perspectives, Vol. 20, No. 1, pp. 153-174 (Winter 2006)

2.

Craig Pirrong, The Thirty Years War, Securities & Investment, Regulation
(Summer 2005)

3.

Concept Release on Equity Market Structure, 17 CFR 242, Release No.

34-61358 (2010) (excerpt)

4.

Joel Seligman, Rethinking Securities Markets: The SEC Advisory

Committee on Market Information and the Future of the National Market
System, 57 Bus. Law 637, 641-47 (2002)

5.

Mary M. Dunbar, Market Structure: Regulation NMS, SIA Compliance

and Legal Division, Annual Seminar (2006)

6.

Excerpt from Coffee Sale, Securities Regulation: Cases & Materials (12th
Edition 2012) (excerpt is from Part III, Regulation of Trading in
Securities, Ch. 10, Regulation of the Securities Markets, pp. 576586;
begin reading below the middle of the page on p. 576 at What Did

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Regulation NMS Do?; stop reading just before the problem at the bottom
of p. 586).

B.

C.

7.

Excerpt from Coffee Sale, Securities Regulation: Cases & Materials (12th
Edition 2012) (excerpt is from Part III, Regulation of Trading in
Securities, Ch. 10, Regulation of the Securities Markets, pp. 625-627
(begin reading at the very bottom of p. 625 at Section 5. Market Data
through the bottom of p. 627)

8.

Excerpt from Coffee Sale, Securities Regulation: Cases & Materials (12th
Edition 2012) (excerpt is from Part III, Regulation of Trading in
Securities, Ch. 10, Regulation of the Securities Markets, pp. 628631)

9.

Excerpt from Coffee Sale, Securities Regulation: Cases & Materials (12th
Edition 2012) (excerpt is from Part III, Regulation of Trading in
Securities, Ch. 11. Regulation of Broker-Dealers, pp. 632 - 638 (stop
reading just before Problems on p. 638))

10.

Section 11A of the Securities Exchange Act of 1934

Class #12 Thursday, Oct. 10

1.

Please be prepared to answer up through question #5 in the Problem Set

2.

Set of Regulation National Market System Rules: Rules 600, 601, 602,
603, 604, 610, and 611 of the Securities Exchange Act of 1934

Class #13 Tuesday, Oct. 15

1.

D.

E.

Class #14 Thursday, Oct. 17

1.

Please be prepared to answer the up through the final question in the

Problem Set (Question #21)

2.

Larry Harris, Trading and Exchanges: Market Microstructure for

Practitioners, Oxford University Press 2003 Chapter 5 (pp. 101-02 on
transparency only)

3.

Set of Regulation National Market System Rules: Rules 605, 606, 607,
and 612 of the Securities Exchange Act of 1934 (also skim all of Reg ATS
and read ATS Rule 301)

Class #15 Tuesday, Oct. 22

1.

F.

Please be prepared to answer up through Question #11 in the Problem Set

Previous class readings continued

Class #16 Thursday, Oct. 24

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1.
III.

Previous class readings continued

The Regulation of Liquidity Provision & Related Services

Buy and sell orders from traders do not always arrive in a way that permits
simultaneous matches. In such situations, liquidity providers (i.e., market makers)
supply liquidity services by buying and selling securities for their own account.
The role of specialists in reducing systemic risk, including a review of their
performance during the 1987 crash and liquidity-provision obligations then and
now, will also be considered. The move from quotations in increments no smaller
than an eighth of a dollar to quotations in increments of one cent and the effects of
this move on investor costs of trading (the bid/ask spread) and on market
quality will also be considered. We will also consider the role of brokers as the
agents who allow traders to access markets, examining their legal obligations to
their clients.
A.

B.

Class #17 Tuesday, Oct. 29

1.

Larry Harris, Trading and Exchanges: Market Microstructure for

Practitioners, Oxford University Press 2003 Chapter 7 (Brokers) and
Chapter 25 (Internalization, Preferencing, and Crossing)

2.

Kevin Haeberle, Structural Inconsistency: Reconciling the SECs Nascent

Stock-Trading Regime with the Securities Regulation Canon (article to be
emailed to students or provided on Courseweb)

Class #18 Thursday, Oct. 31

1.

C.

D.

Previous class readings continued

Class #19 Tuesday, Nov. 5

1.

Securities Exchange Act of 1934, Sections 3(a)(4), 3(a)(5), 3(a)(54), 6,

10(b), 15(a), 15(b), 15A, 15B, 15C, and 19

2.

Securities Act of 1933, Section 17(a)

3.

Securities Exchange Act, Rules 10b-5

4.

Charles Hughes & Co., Inc. v. SEC, 139 F.2d 434 (2d Cir. 1943)

5.

Newton v. Merrill Lynch, 259 F.3d 154 (3rd Cir. 2001)

Class #20 Thursday, Nov. 7

1.

Lehl v. SEC, 90 F.3d 1483 (10th Cir. 1996)

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2.
E.

F.

Class #21 Tuesday Nov. 12

1.

SEC v. First Jersey Securities, 890 F. Supp. 1185 (S.D.N.Y. 1995)

2.

Shivangi v. Dean Witter, 825 F.2d 885 (5th Cir. 1987)

Class #22 Thursday, Nov. 14

1.

G.

H.

Alstead, Dempsey & Co., Sec. Exch. Act. Rel. No. 20825 (1984)

Thomas Lee Hazen, The Law of Securities Regulation (Sixth Edition

2009), A Brokers Obligation to Customers With Regard to
Recommendations: The Know Your Security, Suitability, and Know Your
Customer Obligations, Chapter 14.16 (Excerpt, pp. 609-16)

Class #23 Tuesday, Nov. 19

1.

Hanly v. SEC, 415 F.2d 589 (2d Cir. 1969)

2.

Sample Brokerage Trade Confirmation

3.

Rule 15c1-7 of the Securities Exchange Act of 1934

4.

Larry Harris, Trading and Exchanges: Market Microstructure for

Practitioners, Oxford University Press 2003 pp. 166-68

5.

FINRA Rule 2310. Recommendations to Customers (Suitability)

6.

FINRA Rule 2510. Discretionary Accounts

7.

Rule 15c1-7

8.

David Raymond Koos, Former Registered Representative, New York

Stock Exchange Hearing Panel Decision 01-122, August 1, 2001

9.

Hotmar v. Listrom & Company, Inc., 808 F.2d 1384 (10th Cir. 1987)

Class #24 Thursday, Nov. 21

1.

Larry Harris, Trading and Exchanges: Market Microstructure for

Practitioners, Oxford University Press 2003 pp. 169-71, 141-43, and 3538

2.

Joe Light, Are Brokerage Accounts Safe?, Wall Street Journal, Dec. 31,
2011

3.

Upton v. SEC, 75 F.3d 92 (2d Cir. 1996)

IV.

4.

Andrew Ackerman, SEC Suit Pursued Payouts by SIPC, Wall Street

Journal, Dec. 13, 2011

5.

Exchange Act Rules 15c3-3, 15c2-1, and 15c3-1 (examine sufficiently to

have a basic idea of what they address and how they work)

The Regulation of Traders (including manipulation, short selling, & trading on nonpublic information)
The economics of market microstructure can help our understanding of a variety
of kinds of regulations relating to traders. Traders may try to influence prices in
ways that permit them to buy low and sell high when there has been no change in
the economic fundamentals of the securities involved. The meaning of
manipulation will be considered both in terms of market microstructure
economics and under the Exchange Act. Practical difficulties of proof will be
assessed as well. Rules restricting short selling, including the deregulatory
oriented Reg SHO and temporary short sale reregulation of the shares of financial
intermediaries, will be considered from an economic theory perspective as well.
Lastly, persons who trade on the basis of non-public information can make
supernormal profits. This highly regulated phenomenon will also be considered
from the market microstructure point of view, including a non-conventional
examination of areas of legal, yet controversial trading based on non-public
information.

A.

Class #25 Tuesday, Nov. 26

1.

Securities Exchange Act, Section 9 and Section 15(c)(1)

2.

Securities Act of 1933, Section 17(a)

3.

Larry Harris, Trading and Exchanges: Market Microstructure for

Practitioners, Oxford University Press 2003 Chapter 12 (Bluffers and
Market Manipulation)

4.

In the Matter of Yoshikawa, Admin. Proc. File No. 3-12057, Release No.
34-53731 (SEC 2006).

5.

Excerpts from Thomas Lee Hazen, Securities Regulation Cases and

Materials (Seventh Edition), Chapter 13 (Manipulation) (pp. 862-866)

[THANKSGIVING BREAK]
B.

Class #26 Tuesday, Dec. 3

1.

United States v. Mulheren, 938 F.2d 364 (2d Cir. 1991)

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C.

2.

Steve Theil, $850,000 in Six Minutes The Mechanics of Securities

Manipulation, 79 Cornell L. Rev. 219 (1994) (Excerpt)

3.

Markowski v. SEC, 274 F.3d 525 (D.C. Cir. 2001)

4.

Merritt B. Fox, Lawrence R. Glosten, and Paul C. Tetlock, Short Selling

and the News: A Preliminary Report on an Empirical Study, 54 N.Y. L.
Sch. L. Rev. 645 (2009 - 2010) (excerpts)

Class #27 Thursday, Dec. 5

1.

Zohar Goshen & Gideon Parchomovsky, On Insider Trading, Markets, and

Negative Property Rights in Information, 87 Va. L. Rev. 1229 (2001)
(excerpts)

2.

Larry Harris, Trading and Exchanges: Market Microstructure for

Practitioners, Oxford University Press 2003 Chapter 29 (Insider
Trading)