The lawsuit filed last Friday against the CME Group, Inc. over allegations the company allowed high-frequency traders an early peek at its order info, is a horrible precedent that we will likely see more of, said one markets expert.
Theres a saying, Where theres a hit, theres a writ, said Prof. James J. Angel, a visiting professor of finance at The Wharton School of The University of Pennsylvania. With all the negative attention and misconception about high-frequency trading since the release of Michael Lewiss Flash Boys, lawsuits making these allegations are going to become more prevalent, he added. Angel previously served on the board of Direct Edge Holdings LLC, an exchange operator purchased in February by Bats Global Markets Inc.
[Meet Richard Gates, the whistleblower of Michael lewis’ Flash Boys in a Traders Q&A.]
The suit, filed in federal court in Chicago, against CME Group, the owner of the Chicago Mercantile Exchange and the Chicago Board of Trade, was brought by three CBOT floor traders who claimed that beginning after January 2007, the company allowed HF traders to get a look at buy and sell futures orders before the orders were known to the market, and sometimes before the order was even confirmed to the person making the buy or sell request. The HFTs early access-sometimes just milliseconds ahead of the rest of the market-allowed them to trade in front of the order flow and negatively impact the prices for everyone else, according to the lawsuit. By selling this market advantage to HF traders for a fee while promising other paying users access to real-time data, CME was committing a fraud on the marketplace according to the suit.
CME issued a statement saying the lawsuit was devoid of any facts and that it demonstrates a fundamental misunderstanding of how our markets operate. CMEs statement also alleged the lawsuit was just trying to cash in on the current negative publicity surrounding high-frequency trading.
While the suit seeks class action status for the all exchange users who paid for real-time access from CME, that is where it could run into some trouble, Angel told Traders. To achieve class action status, plaintiffs are going to have to show commonality, that is a common status among all class plaintiffs. And since so many entities trade on the exchange for such a number of different strategies and with some many different securities, that may be very difficult, he added. I think many of the people in that class would not be the kind of individual where 1/100th of a second would matter much-so it gets to be the question of whom exactly is being defrauded?
Indeed, even though overcoming such litigation hurdles as commonality and causality-how the HFT activity actually caused a loss among the plaintiffs-may be difficult, that doesnt mean CME or other exchanges that have struck similar deals with HFTs should laugh off this litigation.
Unfortunately, in some of these cases, if it smells bad, youre convicted, Angle said, adding that it wouldnt be the most unthinkable scenario for a federal judge to be swayed by the hype and push a lawsuit like this to the discovery phase in order to see whats happening behind the scenes of high-frequency trading.
-Gregg Wirth
