US stock exchanges defeat Flash Boys inspired lawsuit

A Federal Judge has said the institutional investors behind it could not prove they suffered harm because of the exchanges’ actions.

After litigation spanning eight years, a Federal Judge has dismissed the case brought by a group of institutional investors that claim US stock exchanges defrauded investors by favouring high frequency trading firms.

Seven stock exchanges including Nasdaq, the New York Stock Exchange (NYSE), and BATS Global Markets – now part of Cboe – were accused of giving HFTs an advantage over other participants by providing them with superior data feeds and order processing, and closer locations to the exchanges to improve the latency of trading signals.

In a decision on 28 March, US District Judge Jesse Furman said that the plaintiffs could not prove they had suffered harm because of the exchange’s actions, declaring that reports from their expert witness were not based on “reliable methodology”.

With this key evidence inadmissible, Judge Furman found that the investors bringing the case had no admissible evidence to prove their own trades had been harmed by the actions of exchanges’ “challenging conduct”.

Originally filed in March 2014 just weeks after the publishing of Michael Lewis’ renowned best-selling novel, the original case was inspired by language and terminology around latency arbitrage used in Flash Boys and subsequently was dubbed the Flash Boys Lawsuit.

It was thrown out by judges in 2015 as Furman found that exchanges had absolute immunity from liability under federal law. This finding was subsequently overturned in a court of appeal two years later.

Latency arbitrage – the practice of making small profits by taking advantage of small microsecond gaps before stocks realign following a correlated instrument price shift – is a practice most associated with high frequency trading firms.

Said firms were gaining $5 billion in profits globally each year in the equities markets, according to a study by the UK’s Financial Conduct Authority (FCA) in 2020 using data from the London Stock Exchange (LSE), and eliminating this practice would reduce the cost of liquidity for institutional investors by 17%.