A number of institutional investors are appealing from a ruling in favor of major stock exchanges, such as NYSE and Nasdaq, in a high-frequency trading (HFT) case.

On April 25, 2022, City of Providence, Rhode Island; United Association National Pension Fund; Employees’ Retirement System of the Government of the Virgin Islands; and Boston Retirement System submitted a notice of appeal from a ruling issued by the New York Southern District Court last month.

As FX News Group has reported, on March 28, 2022, Judge Jesse M. Furman signed an order dismissing the complaint against the defendants.

In this lawsuit, a collection of institutional investors allege that seven stock exchanges violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). Specifically, Plaintiffs allege that the Exchanges sold certain products and services to HFT firms — thereby purportedly giving the HFT firms an advantage over Plaintiffs and the investing public — and failed to fully disclose the effects of these products and services to the market.

The Exchanges have moved, pursuant to Rule 56 of the Federal Rules of Civil Procedure, for summary judgment on the ground that Plaintiffs lack Article III standing. Relatedly, the Exchanges moved, pursuant to Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), to exclude the testimony of an expert on whom Plaintiffs rely to prove standing.

Both motions were granted on Monday, March 28, 2022. The Judge explained that, to survive summary judgment, Plaintiffs must present evidence from which a jury could reasonably conclude that they engaged in at least one transaction from which they suffered harm traceable to Defendants’ allegedly unlawful conduct. Plaintiffs’ only purported such evidence is contained in the expert reports of David Lauer.

But his reports were found inadmissible for two interrelated reasons: They are not sufficiently tied to the facts of the case, and they are not based on reliable methodology. Hence, the plaintiffs cannot establish that they were harmed by Defendants’ conduct, a sine qua non of standing.

In fact, even if they were admissible, Lauer’s reports cannot and do not show harm that is fairly traceable to the Exchanges’ challenged conduct — that is, their provision of the at-issue products to certain firms — because his analyses do not track firms’ use of those products.

This methodological flaw appears to stem from a more fundamental disconnect between the evidence Plaintiffs present (including Lauer’s analyses) and their claims: Plaintiffs’ evidence shows harm caused to non-HFTs by HFT firms, but Plaintiffs are not suing HFT firms; nor do they allege that there is anything unlawful about being a high-frequency trader per se.

Instead, Plaintiffs are suing the Exchanges for their sale of three specific products and services to certain firms.

Because Plaintiffs have not put forward evidence from which a jury could reasonably conclude they have suffered an injury in fact that is fairly traceable to the Exchanges’ sale of these products and services, their claims were dismissed, without prejudice, for lack of standing.

Now, the plaintiffs are taking the case to the Second Circuit Court of Appeals.