Exchanges hope to escalate high-frequency trading case to Supreme Court EXTRA Tuesday, 21 August 2018 2:24 PM ET By Declan Harty The largest U.S. exchange operators have petitioned the U.S. Supreme Court to take up a case questioning whether exchanges favor Wall Street's fastest traders. Brought in the wake of Michael Lewis' 2014 book Flash Boys, the case hinges on whether exchanges sell and offer products and services that illegally favor high-frequency traders over slower institutional investors such as pension and retirement funds. Plaintiffs in the case include the city of Providence, R.I., and a group of pension and retirement funds. The U.S. Court of Appeals for the Second Circuit revived the case in December 2017, two years after the case was dismissed by a district court judge. The decision came as a blow to the exchange-owning defendants, which include Cboe Global Markets Inc., Nasdaq Inc. and New York Stock Exchange owner Intercontinental Exchange Inc. Now the exchanges have asked the U.S. Supreme Court to review documents related to the 2017 decision in hopes that the court will take the case. "The need for certiorari is especially urgent because of the Second Circuit's outsized influence in securities law," the exchanges wrote in their petition for a writ of certiorari. "The court should grant review and restore certainty and stability regarding these critical securities-law issues." If the Supreme Court takes the case, long-standing issues over stock exchange immunity and high-frequency trading would be catapulted onto a new stage. The exchanges did not ask the court to address exchange immunity, but instead, requested it to explore the validity of the Second Circuit's determination that a party, such as the exchanges, can be held liable if their products or services were sold and used in a fraud, even if the scheme was led independently by a separate market participant. The exchanges argued in their petition that the Second Circuit's determination conflicted with several past court decisions. Whether the court will agree to hear the case remains unclear. The Supreme Court accepts between 100 and 150 out of the more than 7,000 cases it is asked to review each year. "I don't think [the odds are] that high," Michael Friedman, general counsel and chief compliance officer of electronic trading and technology company Trillium Management LLC, said in an interview. High-frequency traders have consistently accounted for more than 50% of the average daily volume of the U.S. equity shares traded over the last decade, according to data from research and advisory company TABB Group. These traders, who work at hedge funds, market makers and proprietary trading firms, use complex algorithms and computer systems to conduct millions of trades at speeds quantified by fractions of seconds. Many of these companies rely on exchange-sold products such as market data feeds and co-location services to speed up their processes and execute trades. But the plaintiffs argue that the prices and complexity of such products put high-frequency traders at an advantage. The plaintiffs have also claimed that the exchanges misled investors. "We conclude that the plaintiffs have sufficiently pled that the exchanges misled investors by artificially affecting market activity and that the district court erred in dismissing this action," Second Circuit Judge John Walker Jr. wrote in the 2017 ruling that sent the case back to a federal district court. The exchanges' petition to the Supreme Court is not expected to impact the federal district court's proceedings for the case, said Friedman, who disagreed with the Second Circuit decision. Friedman said he was surprised by the exchanges' rationale for the petition though, saying he expected the request to focus on whether the case should have gone to the SEC rather than the federal courts on its appeal. The case has also raised questions of how far exchanges' immunity reaches, which was a driving factor in the district court's 2015 dismissal. As self-regulatory organizations, exchanges are granted a certain level of legal immunity due to their responsibilities in overseeing trading, and their abilities to issue fines and enforcement actions against market participants. Over the last 20 years, exchanges have transitioned from not-for-profit organizations to publicly traded companies with shareholders, all while their regulatory powers have stayed intact. In its ruling, the Second Circuit determined that exchanges "are not entitled to absolute immunity." Article amended at 11:01 a.m. ET on Aug. 22, 2018, to correct a reference to Second Circuit Judge John Walker Jr.'s 2017 decision and to clarify the rationale for the exchanges' petition.
You mean old school arbitrage . That is still risky compared to hft front running. IMHO exchanges / clearing house should not sell co-location or sell feeds directly. How is that fair ?