CME Sued on Claims High-Frequency Traders Bought Access

Chicago Board of Trade
A trader signals orders on the financial floor at the CME Group Inc.'s Chicago Board of Trade in Chicago. Photographer: Tim Boyle/Bloomberg

CME Group Inc., owner of the world’s largest futures market, was sued by three of its users who alleged the company sold access to order information to high-frequency traders ahead of other market participants.

Traders William C. Braman, Mark Mendelson and John Simms claimed the owner of the Chicago Mercantile Exchange and the Chicago Board of Trade perpetrated “a fraud on the marketplace,” according to a complaint filed April 11 in Chicago federal court.

Scrutiny of high-frequency trading and whether it gives some investors unfair advantage intensified this year amid government probes and the March 31 publication of “Flash Boys” by Michael Lewis. While those examinations have focused mostly on U.S. equity markets, such as dark pools run by banks and exchanges owned by companies including Nasdaq OMX Group Inc., IntercontinentalExchange Group Inc. and Bats Global Markets Inc., high-frequency traders also are active in futures markets.

The lawyer for the three men, Tamara De Silva, said that while the lawsuit wasn’t inspired by the Lewis book, her clients “felt vindicated” by it. De Silva, who didn’t cite any specific instances or evidence of two-tiered access in the complaint, is seeking class-action, or group status, on behalf of all users of real-time futures market data from those exchanges from 2007 until the present.

CME Group said yesterday in an e-mailed statement it will fight the lawsuit and that the complaint is “devoid of any facts supporting the allegations and, even worse, demonstrates a fundamental misunderstanding of how our markets operate.”

Previous Suits

CME Group offers futures based on interest rates, equity indexes, currencies, energy products and agricultural commodities. The company was sued in January by members of the CME and the CBOT who claimed operational changes, including the imposition of an access charge for Globex Electronic Trading platform, diluted the value of their shares.

In a separate suit, an Illinois state judge last month denied a bid by commodities pit traders to halt a change in the CBOT’s methods for determining final trade settlement pricing.

While the old system relied solely upon prices from the last minute of open-outcry floor trading, in 2012 CBOT adopted a new method incorporating electronic transaction results, diminishing the importance of those working in the pits, the traders claimed.

Floor Traders

De Silva’s clients, three former CBOT floor traders who deal in financial futures contracts, contend CME and CBOT breached federal Commodity Exchange Act rules and are seeking unspecified money damages on behalf of their purported class.

In their complaint, they alleged that in 2007, the CBOT and CME began letting high-frequency traders peek “at all orders to buy and sell futures contracts before they were reflected” to the rest of the market.

That glimpse occurred “before the person or entity entering the buy or sell order received confirmation that their order was received -- in other words before anyone other than the HFTs were privy to this information,” according to the plaintiffs.

CME Group “invited HFTs to make trades ahead of all other market participants and because the HFTs generally entered very large orders, they had the ability through their de facto inside trading to influence the price of financial futures artificially,” according to the complaint.

Anita Liskey, a spokeswoman for CME Group, said that wasn’t true and that the exchange only offers one data feed with its prices that all investors get at the exact same time.

“We have only one data feed, no one can buy it to be faster than anyone else,” she said. “No trader can see any other person’s order until it hits the order book, when it is made public.”

Braman and the other traders claim that by charging some traders for real-time market information, while allegedly allowing high-frequency traders to pay for superior access to that that data, the CME-owned exchanges “established an unequal and two-tiered marketplace.”

The case is Braman v. CME Group Inc., 14-cv-2646, U.S. District Court, Northern District of Illinois (Chicago).

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