Major US stock Exchanges object to Court’s ruling in market manipulation case

Maria Nikolova

According to the Exchanges, the Court’s ruling which prevented them from dismissing the case, leaves room for difference of opinion.

Less than a month after Judge Jesse M. Furman of the New York Southern District Court denied a motion to dismiss a market manipulation case targeting a number of US stock Exchanges, the defendants have moved to challenge the Court’s ruling.

The lawsuit was brought by various investors (the plaintiffs) under Sections 6(b) and 10(b) of the Securities Exchange Act of 1934 against BATS Global Markets, Inc., Chicago Stock Exchange, Inc., Direct Edge ECN, LLC, New York Stock Exchange, LLC, NYSE Arca, Inc., Nasdaq OMX BX, Inc., and the Nasdaq Stock Market LLC.

Section 10(b) of the Exchange Act makes it unlawful “for any person, directly or indirectly, . . . to use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.”

The investors allege that the Exchanges are violating the federal securities laws by providing services to high-frequency trading (HFT) firms in a way that amounts to actionable “market manipulation.” In particular, the investors argue that by providing (or selling) HFT firms services that allow those firms to execute allegedly harmful trading strategies more successfully, the Exchanges have engaged in conduct that adds up to an unlawful manipulative scheme under Securities and Exchange Commission Rule 10b-5 and are therefore liable under Section 10(b) of the Securities Exchange Act of 1934.

In May 2019, the Court sided with the plaintiffs and nixed the Exchanges’ motion to dismiss the complaint against them.

On Monday, June 17, 2019, BATS Global Markets, Inc., Chicago Stock Exchange, Inc., Direct Edge ECN, LLC, The Nasdaq Stock Market LLC, Nasdaq OMX BX, Inc., New York Stock Exchange, LLC, and NYSE Arca, Inc. filed a motion with the New York Southern District Court requesting that the Court certify for interlocutory appeal the Opinion and Order denying their renewed motion to dismiss the second consolidated amended complaint (“SCAC”) from May 28, 2019.

The Exchanges argue that the Court’s decision leaves room for differences of opinion.

The defendants note that the plaintiffs did “not allege that they transacted in any particular security at any particular price, or how that price was supposedly affected by the alleged manipulation.”

According to the Exchanges, having simply alleged that the plaintiffs’ bought and sold unidentified stock on unidentified markets at unidentified times and unidentified prices without alleging that they suffered losses attributable to specific transactions, it is equally plausible that the plaintiffs were not injured at all or perhaps even benefitted from the alleged manipulation.

Further, the Exchanges argue that although the Court concluded that it was sufficient for the plaintiffs to allege that they purchased or sold unspecified securities, there is substantial ground for disagreement on this question.

Finally, the Exchanges say if the Court certifies the Order for interlocutory review, it should stay all proceedings in this case pending appeal.

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