Michael Lewis may have spelled out the supposed menace of high-frequency trading in his bestseller “Flash Boys.” What he didn’t do is provide a basis for investors to sue stock exchanges or banks.
On Wednesday, a federal judge in Manhattan rejected a series of court cases alleging the largest U.S. exchanges and a dark pool run by Barclays Plc harmed some customers. The lawsuits were filed on the heels of Lewis’s 2014 book.
“Lewis’s book may well highlight inequities in the structure of the Nation’s financial system and the desirability for, or necessity of, reform,” U.S. District Judge Jesse Furman said in a 51-page opinion. “For the most part, however, those questions are not for the courts, but for commentators, private and semi-public entities (including the stock exchanges), and the political branches of government.”
High-frequency trading generally refers to the use of complex algorithms to rapidly move in and out of stock positions, making money by arbitraging small differences in stock prices, Furman said.
In their lawsuit, the investors said markets including the New York Stock Exchange, Nasdaq Stock Market and venues operated by Bats Global Markets Inc. violated the law by enabling high-frequency firms to exploit ordinary investors trading on the exchanges in return for which the firms directed their “considerable” trading activity to them.
Furman disagreed, saying the exchanges, as self-regulatory organizations, are “absolutely immune from suit based on their creation of complex order types and provision of proprietary data feeds.” He said Congress has decided that the exchanges are to be regulated by the Securities and Exchange Commission.
In all, investors sued seven exchanges. Stacie Fleming, a spokeswoman for Bats; Sara Rich, a spokeswoman for the NYSE; and Joseph Christinat, a spokesman for Nasdaq, declined to comment on the decision.
Furman also rejected claims over the Barclays LX dark pool -- a private stock market operated inside the bank where supply and demand are kept private until after trades are executed. Investors using dark pools may be seeking better prices by masking their trading strategies.
In his book, “Flash Boys: A Wall Street Revolt,” Lewis painted a picture of a U.S. stock market where insiders including exchanges, broker-dealers and high-frequency traders conspire to cheat investors. Everyone who owns equities is victimized by the practices, in which the fastest traders figure out which stocks investors plan to buy, purchase them first and then sell them back at a higher price, according to Lewis, a columnist for Bloomberg View.
In the lawsuits, the investors said Barclays defrauded them by claiming its dark pool was “a safe place to trade.” Furman ruled otherwise, saying the plaintiffs had failed to adequately show that Barclays committed any manipulative acts.
Investors also failed to point to any statements by Barclays that affected the price at which the plaintiffs bought and sold or how high-frequency trading affected the prices at which the securities traded in the dark pool, Furman said.
Marc Hazelton, a spokesman for London-based Barclays, said in an e-mailed statement that the bank was pleased with Furman’s conclusion “that the plaintiffs were unable to identify any materially false or misleading statements” by the firm.
The case isn’t entirely over. Costa Mesa, California-based Great Pacific Securities, which traded in Barclays’ dark pool, may file a new complaint, the judge said.
“The way these trades were implemented, we feel, was deceptive and a fraud upon the market,” Patrick Coughlin, a lawyer for the City of Providence, Rhode Island, and lead counsel for the plaintiffs, said in a telephone interview. He said his clients are considering an appeal.
New York Attorney General Eric Schneiderman has also sued Barclays, accusing the bank of bilking dark-pool customers. That case is pending in another court. Barclays has denied wrongdoing.
In his ruling, Furman noted that various arms of government “have already taken up the issue” identified by Lewis in his book and the investors in their lawsuits. Coughlin said his clients don’t believe the SEC is doing enough to regulate such practices.
The case is In Re Barclays Liquidity Cross and High Frequency Trading Litigation, 14-md-2589, U.S. District Court, Southern District of New York (Manhattan).