CONCEPT: BOURSES, EXCHANGES, AND THEIR LAW
The idea and the origins of stock exchange law are a matter of definition:
their understanding depends on the marketplaces that people consider to be
‘bourses’ or ‘exchanges’ (A.) and on the rules that they regard as ‘stock exchange law’ (B.).
ANLEGERSCHUTZ IM RECHT DER BANKEN 15 n.42 (1975) (Ger.); Heinz-Dieter Assmann,
Kapitalmarktrecht: Zur Formation eines Rechtsgebiets in der vierzigjährigen Rechtsentwicklung der Bundesrepublik Deutschland, in 40 JAHRE BUNDESREPUBLIK DEUTSCHLAND: 40 JAHRE
RECHTSENTWICKLUNG 251, 254 n.9 (Knut Wolfgang Nörr ed., 1990) (Ger.). For important works on stock exchange history since then, see DEUTSCHE BÖRSENGESCHICHTE
(Hans Pohl ed., 1992) (Ger.); Hanno Merkt, Zur Entwicklung des deutschen Börsenrechts von den
Anfängen bis zum Zweiten Finanzmarktförderungsgesetz,
in BÖRSENREFORM: EINE
ÖKONOMISCHE, RECHTSVERGLEICHENDE UND RECHTSPOLITISCHE UNTERSUCHUNG 17-
141 (Klaus J. Hopt, Bernd Rudolph, and Harald Baum eds., 1997) (Ger.); Hanno Merkt,
Kapitalmarktrecht: Ursprünge, Genese, aktuelle Ausprägung, Herausforderungen, in 2 FESTSCHRIFT
FÜR KLAUS J. HOPT ZUM 70. GEBURTSTAG AM 24. AUGUST 2010 2207, 2207-22 (Stefan
Grundmann et al. eds., 2010) (Ger.); LODEWIJK PETRAM, THE WORLD’S FIRST STOCK EXCHANGE: HOW THE AMSTERDAM MARKET FOR DUTCH EAST INDIA COMPANY SHARES BECAME A MODERN SECURITIES MARKET (2011) (Neth.). For an example of the works on the
general history of markets and fairs, see P. HUVELIN, ESSAI HISTORIQUE SUR LE DROIT DES
MARCHÉS & DES FOIRES (1897) (Fr.).
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A. ‘Bourses’ and ‘Exchanges’
The terminology of ‘bourses’ and ‘exchanges,’ respectively, may be explained in different ways: The linguistic roots of the word ‘bourse’ lead back to
the first financial centers in medieval continental Europe (1.). To understand
the exchanges’ underlying idea, one has to focus on their functions in society
(2.). A legal definition should distinguish exchanges that require state supervision from unregulated venues, but legislators so far have failed to accomplish
this task (3.).
1. Linguistic Roots
Linguistically, there are two plausible explanations for the term bourse
(French) or Börse (German), as exchanges are called in many languages: First,
the expression could be a direct derivation from the Medieval Latin word
bursa, a name for, among other things, purses or wallets (from Ancient Greek
βύρσα: coat, skin).2 Second, the term could trace back to a merchant family
of Bruges, whose name van der Burse in turn derives from the Latin word.3
Both explanations shed an interesting light on the exchanges’ very beginning,
and do not exclude each another.
2. Functional Meaning
Exchanges are marketplaces where traders buy and sell negotiable items
with a high degree of standardization. This definition highlights two features:
the negotiability of the items that are traded (such as shares, bonds, derivatives or—most recently—emission permits) and the standardization of the
trading process with ongoing price fixing (only certain items are admitted to
trading, interested parties need permission to trade, and all contracts are concluded under the same provisions). Aside from offering standardized trading,
exchanges also serve a number of other purposes: exchanges produce and
disseminate market data, exchanges regulate the marketplace that they establish, exchanges set minimum standards for the companies whose shares or
bonds are listed at the exchange, and—this is the most recent function—
2 Bursa, 1 MITTELLATEINISCHES WÖRTERBUCH 1626-27 (1967) (Ger.); see also Byrsa, 2 THESAVRVS LINGVAE LATINAE 2266 (1900-1906) (Ger.).
3 Borse, 1 MIDDELNEDERLANDSCH WOORDENBOEK 1385 (1885) (Neth.); see also Beurs, 2/2
WOORDENBOEK DER NEDERLANDSCHE TAAL 2281-86 (1903) (Neth.).
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exchange operators have evolved from not-for-profit entities into listed companies that seek to make money.4
From an overall economic point of view, exchanges promote one of the
key features of large business enterprises: short-term investments in longterm projects. How does it work? Large business enterprises are typically
capital-intensive long-term projects that only capital associations such as
stock corporations can finance. One of the preconditions to accomplish this
goal is that those institutions preclude their shareholders from withdrawing
the capital that they have contributed.
5 It is crucial, then, that capital associations instead allow their members to sell their share to third parties, because
few investors would be willing to provide capital if they could never recall it.
6
Exchanges support this transformative function by establishing a marketplace
where providers of capital and those seeking it can come together at low
transaction costs.
The more liquid the market is, the more attractive capital
commitments become for both sides: investors may sell their shares or bonds
at any time and thereby recover the current value of their investment in the
short term; as a result, listed companies can exclude the redemption temporarily (for bonds) or indefinitely (for equity) and gain planning dependability
for the long term.
3. Legal Term
No jurisdiction has so far been successful in finding a concise legal definition of the terms ‘bourse’ or ‘exchange.’ There is a wide spectrum of markets
that organize trading in negotiable items, and apparently no criteria can adequately distinguish venues that require state supervision from those that do
not. What constitutes an ‘exchange’ in legal terms is therefore not only the
starting point but also one of the key problems of stock exchange law.
The first commercial code, the French Code de commerce (1807),
7 brought a
4 For overviews of the main functions of stock exchanges, see Andreas M. Fleckner, Stock
Exchanges at the Crossroads, 74 FORDHAM L. REV. 2541, 2545-50 (2006) [hereinafter Fleckner, Stock Exchanges]; Andreas M. Fleckner, Exchanges, in MAX PLANCK ENCYCLOPEDIA OF
EUROPEAN PRIVATE LAW 658 (Jürgen Basedow, Klaus J. Hopt and Reinhard Zimmermann eds., 2012) [hereinafter Fleckner, Exchanges].
5 ANDREAS M. FLECKNER, ANTIKE KAPITALVEREINIGUNGEN: EIN BEITRAG ZU DEN KONZEPTIONELLEN UND HISTORISCHEN GRUNDLAGEN DER AKTIENGESELLSCHAFT 49-51
(2010) (Ger.) (as part of a Theorie der Kapitalvereinigung, a general theory of the capital associations); see also id. at 339-442 (protection of common assets inancient Rome).
6 Id. at 51-52, 443-96.
7 CODE DE COMMERCE [C. COM.] Bulletin Des Lois No 164 161-284 (1807) (Fr.).
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few provisions on commercial exchanges (Art. 71-73: “des Bourses de commerce”) but only a cursory definition (Art. 71).
8 The draft of a general German commercial code, the Allgemeines Deutsches Handelsgesetzbuch (1861),9 refrained from regulating stock exchanges at all and therefore lacks any legal
description.
10 When Germany finally introduced an exchange act, the Börsengesetz (1896),
11 policymakers saw themselves not prepared to define the term
and therefore left this task to legal practice and scholarship.
12 Only two years
later, the Prussian Superior Administrative Court, the Preußisches Oberverwaltungsgericht, delivered its famous Feenpalast decision (1898).13 The Court considered the market that the grain and commodity traders of Berlin (Verein
Berliner Getreide- und Produktenhändler) had established an unauthorized exchange.14 While the Court mentioned a long list of criteria that constitute an
exchange,15 it failed to find a concise definition that would satisfy the practical
8 “La bourse de commerce est la réunion qui a lieu, sous l’autorité du Gouvernment, des
commerçans, capitaines, de navire, agens de change et courtiers.” CODE DE COMMERCE
[C. COM.] art. 71 (1807) (Fr.).
9 Entwurf eines allgemeinen deutschen Handelsgesetz-Buchs [DRAFT], Mar. 12 1861, reprinted in Protokolle der Commission zur Berathung eines allgemeinen deutschen Handelsgesetz-Buches, Beilagen-Band zu den Protokollen DXLVIII-DLXXXIX (1861) (Ger.)
[hereinafter ADHGB of 1861].
10 For an overview of the general German commercial code, see Andreas M. Fleckner,
Allgemeines Deutsches Handelsgesetzbuch, in MAX PLANCK ENCYCLOPEDIA OF EUROPEAN PRIVATE LAW, supra note 4, at 51-56; for an index of the sources, see Andreas M. Fleckner,
Aktienrechtliche Gesetzgebung (1807-2007), in 1 AKTIENRECHT IM WANDEL 999, 1037-41,
(Walter Bayer and Mathias Habersack eds., 2007) (Ger.) [hereinafter Fleckner, Gesetzgebung].
11 Börsengesetz [Exchange Act], June 22, 1896, REICHSGESETZBLATT [RGBL.] at 157-76
(Ger.).
12 Begründung zum Entwurf eines Börsengesetzes (explanatory notes) [Exchange Act] Dec.
3, 1895, REICHSTAGS-DRUCKSACHE 14/1895-96 at 14, 25-26 (supp. vol., at 11, 17) (Ger.).
13 34 ENTSCHEIDUNGEN DES KÖNIGLICH PREUßISCHEN OBERVERWALTUNGSGERICHTS
[PRVERWGE] [Prussian Supreme Administrative Court] Nov. 26, 1898 (III B 44/98), at
315-39 (Ger.).
14 Id.
15 “Zunächst müssen Versammlungen einer größeren Zahl von Personen vorliegen, die an
einem ein für alle Mal bestimmten Orte und zu einer allgemein bestimmten Zeit, wenn
nicht täglich, so doch in verhältnißmäßig kurzen Zwischenräumen regelmäßig abgehalten
werden, und deren Wiederholung von vornherein beabsichtigt ist. Die sich Versammelnden müssen sodann wenigstens vorwiegend selbständige Kaufleute oder
kaufmännische Hülfspersonen sein und ihren Geschäftssitz am Orte der Versammlungen
oder in dessen Nähe haben. Die Versammlungen müssen weiter dem Handel mit nicht
zur Stelle gebrachten vertretbaren Waaren dienen, und zwar so, daß der in ihnen betriebene Handel wiederum zwar nicht ausschließlich, aber doch in erheblichem Maße ein
Handel von Großhändlern unter einander ist.” Id. at 315, 335-36.
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needs. As a result, the exchange definition became a widely recognized problem and a highly controversial topic among German lawyers. Other jurisdictions show similar experiences: When, four decades later, the United States
enacted its seminal Securities Exchange Act (1934),16 it included a definition
(kept to this day) of the term ‘exchange’ that is, notwithstanding its lengthy
character, still circular, because it refers to “the functions commonly performed by a stock exchange as that term is generally understood.”1
7 The following decades brought spirited debates all over the world,18 but little progress in finding a definition because technological advancement had superseded and thereby rendered irrelevant all the physical criteria that were once
put forward to distinguish exchanges from other markets (such as an exchange building or certain trading hours around noon).
New impulses arose on the European level one decade ago (2004).
19 The
directive on markets in financial instruments (commonly referred to as MiFID) defines at its outset the term ‘[r]egulated market’ as “a multilateral system operated and/or managed by a market operator, which brings together or
facilitates the bringing together of multiple third‑party buying and selling
interests in financial instruments—in the system and in accordance with its
nondiscretionary rules—in a way that results in a contract, in respect of the
financial instruments admitted to trading under its rules and/or systems, and
which is authorised and functions regularly and in accordance with the provi-
16 Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78jj (1934).
17 “The term ‘exchange’ means any organization, association, or group of persons, whether
incorporated or unincorporated, which constitutes, maintains, or provides a market place
or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market
facilities maintained by such exchange” Id. § 78(c)(a)(1).
18 See, e.g., Bd. of Trade of Chicago v. SEC, 883 F.2d 525, 535-36 (7th Cir. 1989); Bd. of
Trade of Chicago v.
SEC, 923 F.2d 1270 (7th Cir. 1991); Therese H. Maynard, What is an
“Exchange”? Proprietary Electronic Securities Trading Systems and the Statutory Definition of an Exchange, 49 WASH. & LEE L. REV. 833-912 (1992); Klaus J. Hopt & Harald Baum, Börsenrechtsreform in Deutschland, in BÖRSENREFORM: EINE ÖKONOMISCHE, RECHTSVERGLEICHENDE UND RECHTSPOLITISCHE UNTERSUCHUNG, supra note 1, at 287, 377-91; RUBEN
LEE, WHAT IS AN EXCHANGE? THE AUTOMATION, MANAGEMENT, AND REGULATION OF
FINANCIAL MARKETS (1998).
19 Directive 2004/39 of the European Parliament and of the Council of 21 April 2004 on
markets in financial instruments amending Council Directives 85/611/EEC and
93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council
and repealing Council Directive 93/22/EEC, 2004 O.J. (L 145) 1-44 (EC) [hereinafter
MiFID].
520 Virginia Law & Business Review 7:513 (2013)
sions of Title III.”
20 When the German legislature implemented the MiFID
into German law (2007),
21 policymakers decided to use the MiFID’s definition of the ‘regulated market’ as a blueprint to introduce, for the first time
ever, a legal definition of the ‘exchange’ (Börse) into the new Exchange Act
(Börsengesetz): “Exchanges are institutions of public law with partial legal capacity that regulate and monitor, in accordance with this Act, multilateral
systems that bring together or facilitate the bringing together of interests of a
large number of people, in buying and selling goods and rights permitted to
trade at the exchange, within the system according to established rules in a
way that results in a contract for the purchase of these traded goods.”
22
Both the European and the German definition properly describe the exchanges’ key functions, the establishment and regulation of a market for negotiable items (see 2. above). However, both definitions are only of limited
practical use because they fail to separate the consequences of a market’s
official recognition as an exchange (especially legal capacity) with its prerequisites (such as the conclusion of contracts within the system). Put differently,
the definitions fall short of identifying exchanges that require regulation from
markets that need no governmental oversight. In light of this, all parties involved would be well advised to distinguish between a formal exchange definition (referring to marketplaces that are recognized by the competent authorities as exchanges) and a material exchange definition (venues that meet
the requirements for being admitted as exchanges).
