Public outcry in the US over the role of high-frequency trading (HFT) is likely to lead to a series of lawsuits, according to one exchange which was wrongly accused in a recent class action suit.
Since the publication of Michael Lewis’ Flash Boys book in March, which opens up the world of HFT and has led to suggestions the US stock market is rigged against investors, the impact of high-speed electronic trading on markets has risen to the top of the political agenda.
David Downey, CEO of single-stock futures exchange OneChicago, said lawyers looking to become the lead attorney in a major legal case on high-frequency trading are targeting a broad range of individuals and institutions, accusing firms of rigging markets against the interests of investors.
His exchange was initially named in a case brought by the city of Providence on Rhode Island, which is suing dozens of exchanges, brokers and traders, saying they diverted billions of dollars away from investors buying and selling shares on US markets from April 2009 to the present day.
Though the case against OneChicago has now been dropped, Downey said the current publicity around HFT means many market operators and participants are at risk of legal action.
“Every lawyer wants to be the lead attorney on this case, and so they’re talking to all the major investors and casting a wide net, which in our case led to us mistakenly being named in the original filing,” he explained.
The case itself, titled ‘City of Providence v. BATS Global Markets Inc., et al.’, could be one of the biggest class actions ever taken against the US finance industry.
It has accused 16 national securities exchanges, including BATS, CBOE, Nasdaq and NYSE, and 12 brokers, including every major Wall Street investment bank. Additionally, 11 high-frequency trading firms including Virtu Financial, which was forced to delay its high-profile IPO last month following the furore kicked up by the release of Flash Boys.
Though the case has been made on behalf of any investor who traded shares on a US securities exchange in the past five years, Downey said retail investors have actually benefited from HFT and electronic trading.
“While there has been a lot of controversial TV coverage of HFT in the past month, the retail public isn’t getting hit by this,” he said. “Years ago it wouldn’t be unusual to have a 12 cent spread and it’s the retail investor who had to pay that. Having HFT in the market has helped reduce this significantly so now they pay a penny or less.”
While the debate on whether markets are rigged or not will likely go on, Downey said the SEC needs to return to a regime of affirmative obligation for market makers to ensure investors are protected.
He added: “Genuine market makers should be rewarded for providing that service. Perhaps they could be flatlined at five milliseconds with everyone else in the market limited to 10 milliseconds, which would ensure they can operate low latency strategies while everyone else gets access to liquidity.”
He also suggested that random delays on orders of up to 100 milliseconds would also deter predatory strategies focused on latency arbitrage and encourage genuine liquidity back into the market.
SEC chair Mary Jo White recently told the House of Representatives that she rejected claims HFT was fleecing retail investors.
“I want to be very clear that the market metrics suggest that the retail investor is very well-served by the current market structure,” she told the House.