A case alleging that certain U.S. stock exchanges fostered an environment that illegally favored high-frequency traders is being revived under a recent decision from the U.S. Court of Appeals for the Second Circuit.
The case was brought forth by a handful of plaintiffs including the city of Providence, R.I., and pension and retirement funds. The plaintiffs argued that the exchanges fostered an environment that favored high-frequency traders through some market data products, colocation services and complex order types. As a result, the high-frequency traders' successes came at the expense of institutional investors, the plaintiffs argued.
But in August 2015, the case was dismissed by U.S. District Court Judge Jesse Furman, who said the claims were insufficient to proceed and that the exchanges were immune from some of the allegations over their market data feeds and complex order types.
The exchanges listed in the lawsuit include venues owned by Cboe Global Markets Inc., Intercontinental Exchange Inc., Nasdaq Inc. and Chicago Stock Exchange Inc. Barclays Plc is also named in the lawsuit as a defendant.
More than two years after the dismissal, three appellate judges vacated the dismissal, calling for the case to be retried in the lower court with their findings as a guide.
"We conclude that the plaintiffs have sufficiently pled that the exchanges misled investors by artificially affecting market activity and that the district court erred in dismissing this action on that basis," Circuit Judge John Walker Jr. wrote.
The appeals court found that the plaintiffs' claims showed that the exchanges developed a "fraudulent scheme" that benefited themselves and high-frequency trading firms, that the products and services were sold at rates that only the fastest traders could afford and that the exchanges then did not adequately alert the investing public to how those products and services could be used.
Nasdaq called the claims that the exchanges manipulated markets in favor of high-frequency traders "without merit" in its most recently filed Form 10-Q.
The decision to revisit the role of high-frequency trading and exchanges comes as many market participants echo similar concerns over exchanges' market data businesses, which involve selling proprietary data feeds to high-speed traders seeking to fulfill their best-execution obligations.
Most recently, a Securities and Exchange Commission administrative judge renewed another long-standing case that could upend exchanges' most profitable business by capping the amount they can charge for such proprietary market data feeds. Weeks earlier, a group of banks and trading companies also pushed for the SEC to review the exchanges' businesses.
Exchange executives, including ICE Chairman and CEO Jeffrey Sprecher, have said that the concerns over market data businesses are outdated and that the business is not nearly as expansive as many believe it to be. ICE owns the New York Stock Exchange.