Three class action lawsuits by an individual investor against stock exchanges which gave high frequency traders an advantage by releasing market data to premium customers earlier than other investors were dismissed on Wednesday.
The Plaintiff sought to bring a breach of contract claim against BATS Global Markets, Nasdaq OMX Group and Intercontinental Exchange. The ruling relied on the doctrine of preemption to dismiss the complaint. It says that Congress intended to create a comprehensive federal scheme governing dissemination of market data with rules, regulation and oversight by the SEC and self-regulatory organizations. The plaintiff, according to the court, cannot sue for something that was approved by the regulators. If the court upheld the Plaintiff’s claims, there would be a conflict between federal law and state law.
The lawsuits were filed following the publication of Michael Lewis’ book “Flash Boys” last year. There are still pending lawsuits against high-frequency traders filed by the city of Providence and other investors.
Whistleblowers with information about misconduct by high frequency traders can report them to the Securities & Exchange Commission and the Commodity Futures Trading Commission. This have been a popular area for securities whistleblowers since the creation of the Dodd-Frank whistleblower programs. Several whistleblowers or their attorneys have come forward in this area following enforcement actions or settlements by regulators to claim credit for the government’s actions.
High frequency trading has been a controversial aspect of the market recently. A report issued today by the Senior Supervisors Group, a group composed of financial services regulators from ten countries, identified the potential for HFT firms to quickly acquire risk across various assets as a significant risk. It also warned that errors can cascade through the market and that internal controls to prevent may not have kept up with the technology.
Although I haven’t yet read the report, it sounds to me like a replay of the Knight Capital scenario is definitely their concern. Knight was a market maker that incorrectly deployed code to an automated equity router. In 45 minutes on the morning of August 1, 2012, it sent more than 4 million orders into the marketplace in order to fill 212 customer orders. Knight traded more than 397 million shares as a result and suffered an eventual loss of more than $460 million. Their system generated an email warning a group of employees of the error, but they didn’t act upon it before the market opened.
If you have questions about whistleblower law or have evidence of corporate wrongdoing, one of our SEC whistleblower attorneys can assist you. Please contact us or call 1-800-590-4116 to speak to a lawyer at McEldrew Young.