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Tuesday, October 15, 2019

Judge says commodities traders chose wrong target when suing CME over high frequency traders' market manipulation

By Scott Holland | Dec 4, 2015

A federal judge has ruled a group of commodity traders who felt they had been harmed by the manipulative activities of so-called “high frequency traders” had misplaced their grievance when they filed a complaint against the Chicago Mercantile Exchange.

The putative class action, represented by plaintiffs William Charles Braman, Mark Mendelson and John Simms, alleged the CME granted unfair advantages to certain classes of traders. Class members would have included any public investor who bought or sold futures contracts listed on the CME and Chicago Board of Trade, or who used futures market data purchased from CBOT or CME, between Jan. 1, 2005, and April 10, 2014.

The complaint alleged violation of the Commodity Exchange Act and federal antitrust laws, as well as claims of fraud and unjust enrichment. In a ruling issued Dec. 3 in Chicago, U.S. District Judge John Robert Blakey granted CME’s motion to dismiss the plaintiffs’ second amended complaint. In late May, the same court denied a motion to file a third amended complaint.

The exchanges, the complaint alleged, “together with a sophisticated class of technology-driven entities known commonly as ‘high frequency traders’ … have provided and utilized information asymmetry along with clandestine incentive agreements and illegal trading practices to create a two-tiered marketplace that disadvantages the American public and all other futures marketplace participants, all the while continuing to represent to the public and their regulators that they continue to provide transparent and fair trading markets to the global market.”

They further alleged the advantages given to the high frequency traders come at the expense of the putative class members “by effectively providing HFTs with the opportunity to skim an improper profit on every futures transaction.”

In reviewing the plaintiff’s complaint, Blakey acknowledged statute of limitations concerns should not affect their ability to proceed. But in reviewing the claims regarding the Commodity Exchange Act, he noted that, while some of the activities alleged could be violations, the plaintiffs technically have sued “to hold the defendants liable for creating the circumstances in which such activity flourished.”

In trying to claim manipulation, the judge said the plaintiffs needed to prove a number of things, including that defendants could influence prices, that an artificial price existed, that the defendants caused that artificial price and that they specifically intended to do so. Yet, Blakey writes, “At a minimum, plaintiffs’ allegations fail to show the last three elements.”

In an opposition brief, the complaint named just one high frequency trader, identified as Virtu, “Yet they do not allege that any of them actually suffered damages as a result of anything Virtu did or failed to do — indeed, they do not allege that they traded any of the same commodities or contracts Virtu traded.”

Blakey said the plaintiffs failed to allege “the occurrence of high frequency trading on the exchanges unreasonably restrains trading by regular investors … Nor have plaintiffs alleged that the defendants endeavored in any way to fix prices.”

In looking at “anticompetitive” strategies, such as wash trades and spoofing, Blakey found any such strategies, if used at all, were the actions of the high frequency traders and not the exchanges. The failure to adequately demonstrate statutory violations or fraud undercut the unjust enrichment claim, the judge said.

Ultimately, while Blakey did not reject the idea the plaintiffs were somehow harmed, the primary issue with the complaint is the “claims do not properly lie against the named defendants. … this court’s task is not to adjudicate the fairness or appropriateness of high frequency trading. The court today assesses only whether the plaintiffs have stated claims for which relief may be granted. They have not.”

The plaintiffs were represented by the firm of Lovell Stewart Halebian Jacobson LLP, of New York, and had been represented by Chicago attorney R. Tamara de Silva and the firm of O’Rourke & Moody, of Chicago.

CME was defended by the firm of Skadden Arps Slate Meagher & Flom, of Chicago.

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Organizations in this Story

Law Offices of R. Tamara de Silva Lovell Stewart Halebian Jacobson LLP O'Rourke & Moody Skadden, Arps, Slate, Meagher & Flom LLP

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