Some of the world’s biggest exchanges argue against claims that they crated a system that favored HFT firms.
New York Stock Exchange LLC, NYSE ARCA Inc., BATS Global Markets, Inc., Direct Edge ECN, LLC, NASDAQ OMX BX, Inc., The Nasdaq Stock Market, LLC, and Chicago Stock Exchange Inc, have sought to dismiss allegations that they created products and services that favored high-frequency trading (HFT) firms. On Friday, May 18, 2018, the Exchanges filed a Motion to dismiss and accompanying Memorandum with the New York Southern District Court.
- The case
First off, let’s recall some of the peculiarities of the case.
The lead plaintiffs, institutional investors who traded on the defendant stock exchanges during the class period, allege that the exchanges misled them about certain products and services and created a two-tiered system that favored high‐frequency trading (HFT) firms at the plaintiffs’ expense.
The plaintiffs assert that the Exchanges created three products and services for “favored” HFT firms – proprietary data feeds, co-location services, and complex order types, in order to provide these firms with more data at a faster rate than the investing public and thereby to attract HFT firms to trade on their exchanges.
In doing so, the exchanges used the HFT firms to generate hundreds of millions of dollars in fees and established a system that, unbeknownst to the plaintiffs, catered to the HFT firms at the expense of individual and institutional traders.
In March 2018, the United States Court of Appeals for the Second Circuit disagreed with a ruling of the New York Southern District Court in favor of BATS Global Markets, Inc., the Chicago Stock Exchange Inc., the Nasdaq Stock Market, LLC, and the New York Stock Exchange LLC (NYSE). On March 20, 2018, the judgment of the District Court was vacated and the case was remanded for further proceedings consistent with the Opinion of the Court of Appeals. The USCA concluded that the defendant exchanges are not entitled to absolute immunity.
- The counterarguments
As per the documents filed with the Court on Friday, May 18, 2018, the Exchanges seek to dismiss the amended complaint and argue that the claims made in it fail to (inter alia) plead Article III or statutory standing, do not comply with the PSLRA’s (the Private Securities Litigation Reform Act) procedural requirements, fail to plead reliance, fail to plead loss causation, fail to plead scienter, and fail to adequately plead falsity of any challenged statement allegedly made by the Exchanges.
Specifically, according to the Exchanges, the plaintiffs have not alleged the purchase or sale of any specific security, and their PSLRA certifications set forth only gross annual numbers of shares bought and sold (for instance, all Common stocks) without identifying any particular stock, the exchange on which that particular stock was purchased or sold, the date of purchase or sale, the amount purchased or sold, the price, or how that price was supposedly affected by the alleged manipulation. The Exchanges argue that these omissions mean that the plaintiffs have alleged neither Article III standing nor statutory standing.
Furthermore, the plaintiffs are said to fail to allege loss causation, that is, the causal connection between the material misrepresentation and the loss a plaintiff suffers. According to the Exchanges, the plaintiffs must allege not only that they bought or sold specific securities at manipulated prices, but also that the prices of those specific securities would have been lower or higher, respectively, absent such manipulative conduct.
But the plaintiffs have never identified any price they paid for any particular security traded on any exchange at any particular time. Nor have they pleaded any specifics about how any particular stock was manipulated or by whom. Without this information, the plaintiffs cannot possibly plead any specific loss, the Exchanges say.
In addition, the Exchanges argue that the Securities and Exchange Commission (SEC) possesses the regulatory authority to supervise the conduct that forms the basis of the plaintiffs’ claim. Also, the SEC exercises its regulatory authority over propriety data feeds, co-location services, and complex order types. According to the Exchanges, permitting the plaintiffs’ claim would create conflicts with the Exchange Act’s regulatory structure and the SEC’s regulatory authority.
The Exchanges refer to a Letter by the SEC from 2016 which is seen to fully support dismissal on preclusion grounds in this case. The Letter states that “Where a plaintiff’s claims conflict with, or otherwise obstruct, the Commission’s regulation of the exchanges, the Commission expects that such claims will—and should—be foreclosed”.
The Exchanges request that the Court dismisses the complaint against them without prejudice.
The case is captioned In Re: Barclays Liquidity Cross and High Frequency Trading Litigation (1:14-md-02589).