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Legal Liability for Fraud in the Evolving Architecture of Securities Markets: From Marketplaces to Traders

Stanislav Dolgopolov

in Global Algorithmic Capital Markets: High Frequency Trading, Dark Pools, and Regulatory Challenges

This chapter analyses the reach of legal liability for securities fraud in the United States in relation to certain types of abuses often associated with high frequency trading strategies. The nature ... More

This chapter analyses the reach of legal liability for securities fraud in the United States in relation to certain types of abuses often associated with high frequency trading strategies. The nature of algorithmic and high-frequency trading presents new challenges for establishing legal liability for fraud in securities markets. It specifically examines the reach of legal liability in relation to two, sometimes overlapping, entities: marketplaces and proprietary traders. Through an examination of various informational asymmetries in securities markets, including the order type controversy, this chapter finds that establishing liability for securities fraud is significantly murkier for proprietary traders than for marketplaces. Subsequently, this study addresses potential approaches to the reach of liability to traders and discusses mechanics and proper characterization of the underlying harm.Less

Corporate Law and Securities Markets

Luca Enriques, Gerard Hertig, Reinier Kraakman, and Edward Rock

in The Anatomy of Corporate Law: A Comparative and Functional Approach

This chapter focuses on the regulation of corporations as “issuers,” that is, as tools to raise finance from the public. All representative “core jurisdictions” have specific rules applying to the ... More

This chapter focuses on the regulation of corporations as “issuers,” that is, as tools to raise finance from the public. All representative “core jurisdictions” have specific rules applying to the offer of securities to the public and to the ongoing governance and disclosure of companies whose securities are held by the investing public. While motivated by the need to protect investors, their economic function is rather in supporting capital markets as an efficient tool to allocate capital among corporations. This requires that markets are informationally efficient and prices are sufficiently informative. After reviewing the reasons why legal rules are held to be necessary to attain of the goal of price informativeness, the chapter examines mandatory disclosure frameworks. It highlights similarities and differences in issuer disclosure rules, assesses the degree of convergence in accounting law, and describes the use of other strategies, including banning insider trading and market manipulation (i.e., securities fraud). Public and private enforcement and gatekeeper control are examined, highlighting the gap in enforcement intensity between the U.S. and other jurisdictions.Less

The Political Class in a Poor State

Ron Formisano

in American Oligarchy: The Permanent Political Class

One of the poorest states in the nation, Kentucky possesses a political class that is thriving.

Trading and Market Integrity

John Armour, Dan Awrey, Paul Davies, Luca Enriques, Jeffrey N. Gordon, Colin Mayer, and Jennifer Payne

in Principles of Financial Regulation

This chapter reviews the regulation of trading activity in financial markets, focusing on three particular forms of regulated conduct in the market, namely market manipulation, insider trading, and ... More

This chapter reviews the regulation of trading activity in financial markets, focusing on three particular forms of regulated conduct in the market, namely market manipulation, insider trading, and short selling. Market manipulation (in the form of trade-based manipulation and information-based manipulation, or securities fraud) and insider trading are prohibited in all major jurisdictions. If permitted to occur, these activities would be likely to cause systematic losses to market makers, who will increase their bid–ask spreads in order to compensate themselves. These costs will in turn be passed on to investors, making it more costly for them to buy and sell securities, which will correspondingly reduce investors’ willingness to participate in the market, meaning issuers will face a higher cost of capital. On the other hand, restrictions on short selling—which have been introduced, following the financial crisis, in a number of jurisdictions—are much harder to justify.Less

Synthesis and Conclusion

Alan N. Rechtschaffen

in Capital Markets, Derivatives and the Law: Evolution After Crisis

This book examined products and participants in the capital markets as well as the tapestry of federal regulation of financial instruments. It explained how incorporating derivatives into structures ... More

This book examined products and participants in the capital markets as well as the tapestry of federal regulation of financial instruments. It explained how incorporating derivatives into structures may enhance yield and encourage market participation by allowing issuers to access capital from investors. This chapter looks at structured notes and how they can be used to shift risk by allowing the parties to hedge or speculate in specifically identifiable risks. It considers the securities fraud charges filed by the SEC against Goldman, Sachs & Co. and its employee, Fabrice Tourre for making material misstatements and omissions in connection with a synthetic collateralized debt obligation (“CDO”). It also describes a historical example of structured notes and their pricing dating back to the Civil War, explains range notes, discusses internal leverage and market risk, and outlines the enormous risks inherent in certain structured notes.Less

Introduction

Aziz Z. Huq

in The Collapse of Constitutional Remedies

The introduction of the book sets out the present state of constitutional remedies in US federal courts by contrasting two different recent cases. In one case, a victim of police violence received no ... More

The introduction of the book sets out the present state of constitutional remedies in US federal courts by contrasting two different recent cases. In one case, a victim of police violence received no hearing at all, despite being badly hurt by actions that were very likely illegal. In the second case, a law firm challenged antifraud regulation, expressing the hypothetical concern that the president might not be able to fire the relevant regulator consistent with the Constitution. That case received a hearing and prevailed. These cases, the introduction explains, show a deep schism in the present system of constitutional remedies. It argues that these differences have to be understood in light of the deeper structure and history of courts in the United States.Less