What Did the Dismissal of Some Lawsuits Against the Exchanges This Week Really Mean?

This week the United States Southern District of NY Court denied five pending class action lawsuits which were brought against the stock exchanges and Barclays.  In its 51 page ruling , the Court stated:

“More to the point, the only question for this Court on these motions is whether the Complaints in these cases are legally sufficient to survive Defendants’ motions. Applying well established precedent from the United States Supreme Court, the United States Court of Appeals for the Second Circuit, and the California Supreme Court, the Court is compelled to conclude that they are not.”

It is important to note that these class action dismissals have nothing to do with the pending NY Attorney General case against Barclays which is still being prosecuted. The class action cases against the exchanges were claiming fraud and manipulation surrounding the services of colocation, order types and proprietary data feeds.  We didn’t think that most of them had a chance to succeed since they wouldn’t be able to pass the legal sufficiency test of the Court. The Court agreed and stated:

The SDNY Plaintiffs, however, fail to explain how merely enabling a party to react more quickly to information can constitute a manipulative act, at least where the services at issue are publicly known and available to any customer willing to pay. Second, and more broadly, the SDNY Plaintiffs fail to allege primary violations by the Exchanges themselves.”

It is also important to note that these cases contrast from the Lanier Case (brought by the lawyer Michael Lewis) which was based on breach of contract by the exchanges.  The Lanier case is much more detailed and focuses on the arrival time of quotes at the SIP and the broken promises not to deliver data to anybody ahead of the SIP.  The Lanier case, which we think is a much better case since it is a case based on contract law, is currently pending appeal.

One important takeaway from these dismissals is that the Court waived the absolute immunity status of the exchanges when it comes to colocation services.  The Court stated:

Whether absolute immunity applies to the provision of co-location services is easily answered. It does not…It is hard to see how the provision of co-location services serves a regulatory function or differs from the provision of commercial products and services that courts have held not to be protected by absolute immunity in other cases.”

This waiver may open the exchanges up to other potential litigation concerning their colocation services.  The Court did however rule in favor of absolute immunity for exchanges when it comes to order types and proprietary data feeds.

In its conclusion, the Court sought to make a point that while they don’t see the merits for a legal claim, the practices that were alleged in the cases may indeed be problematic and could require regulatory action:

“As discussed at the outset of this Opinion and Order, the Court’s task in deciding the present motions was not to wade into the larger public debate about HFT that was sparked by Michael Lewis’s book Flash Boys. Lewis and the critics of HFT may be right in arguing that it serves no productive purpose and merely allows certain traders to exploit technological inefficiencies in the markets at the expense of other traders. They may also be right that there is a need for regulatory or other action from the SEC or entities such as the Exchanges and Barclays. Those, however, are debates and tasks for others. The Court’s narrow task was, instead, to decide whether the Complaints in these cases were legally sufficient to survive Defendants’ motions to dismiss. Having concluded that they are not, the Complaints must be and are dismissed.” 

The Court is right.  In these class action suits, they didn’t have enough legal authority to judge if what the exchanges were guilty of fraud and manipulation.  However, the Court does seem to urge regulators and other industry participants to pursue this debate which we gladly plan on doing.