The Lawsuits Are Starting to Pile Up


The HFT-enabling crowd still doesn’t seem to grasp the effect that “Flash Boys” has had on their world.  They continue to shrug off all the public outrage and consider it just “hysteria”.  They think they can continue going about their usual method of silencing the critics like they did with the Facebook IPO, the BATS IPO, the Knight debacle, etc.  Usually, their methods include trotting around the halls of Congress with a paid-for academic paper or confidential market structure report (which dare not be redistributed) from a so-called market structure expert.  They usually say the anti-HFT crowd doesn’t know what they are talking about and that the brush fire that arose from the market structure event has already been put out.

But this time is different.  Almost a month after the release of “Flash Boys”, the public is still outraged.  And the brush fires are growing into 6-alarm raging infernos.  The latest infernos are the class action lawsuits that are starting to pile up like the one from the City of Providence, Rhode Island. The lawsuit, which is filed against all of the exchanges, brokers (including the newly reformed Goldman Sachs) and HFT firms (including Virtu and Tradeworx) casts a very wide net and pulls material direct from “Flash Boys”.  No doubt it will keep the lawyers at these firms busy for some time to come.  The lawsuit​ makes these accusations:

-Contrary to the duties imposed upon them by law, U.S. Securities and Exchange Commission (“SEC”) rules and their own regulations, the Exchange Defendants together with the Brokerage Firm Defendants and the HFT Defendants (collectively, “Defendants”) participated in the scheme and wrongful course of business complained herein whereby certain market participants were provided with material, non-public information so that those market participants could use the informational advantage obtained to manipulate the U.S. securities market to the detriment of Plaintiff and the Plaintiff Class. 

-Exchange Defendants and those Defendants that controlled alternate trading venues demanded and received substantial kickback payments in exchange for providing the HFT Defendants access to material trading data via preferred access to exchange floors and/or through proprietary trading products. 

– Defendants’ predatory practices included the Brokerage Firm Defendants selling “special access” to material data, including orders made by Plaintiff and the Plaintiff Class so that the HFT Defendants could then trade against them using the informational asymmetries and other market manipulation detailed herein. ​

The lawsuit claims that for at least the last 5 years, the defendants engaged in “electronic front running”, “rebate arbitrage”, “slow market or latency arbitrage”, “spoofing”, “layering” and “contemporaneous trading”.  When naming the broker defendants, the lawsuit makes a point to note that while many of these brokers operate their own dark pools, they also maintain their own proprietary desk which engage in high frequency trading.

Retail brokers were also subject of the lawsuit which claimed that TD Ameritrade brings in an estimated $227 million in annual revenues selling its customers’ orders to HFT firms to trade against (E-Trade brings in an estimated $100 million selling order flow).

You can bet that the City of Providence is not the only city or group of people that is going to file a lawsuit against the exchanges, brokers and HFT firms.   The business of HFT has suddenly taking a turn and the lawyers are just getting started.  It really is too bad that it had to get to this point.  If our regulators had addressed the fragmentation issue years ago, we probably wouldn’t be in the situation that we are in today where the lawsuits are starting to pile up.