Nasdaq seeks to bring HFT lawsuit to an end
The Nasdaq Stock Market LLC and Nasdaq BX, Inc are seeking a swift resolution of a lawsuit involving allegations of market manipulation via high frequency trading (HFT). This becomes clear from a motion for a summary judgment filed by Nasdaq at the New York Southern District Court on May 28, 2021.
Nasdaq is one of the many defendants (NYSE and Bats, for instance) in this lawsuit, which targets some of the major stock exchanges. The lawsuit was filed on behalf of investors that traded on a registered public stock exchange or a U.S.-based alternate trading venue, between April 18, 2009 and the present, and asserted claims against: (1) registered public stock exchanges located in the United States; (2) a class of brokerage firms; and (3) a class of HFT firms.
The plaintiffs claim, inter alia, that certain defendants allowed HFT firms to profit at the expense of the class and to manipulate securities markets in violation of federal securities laws.
According to the documents, filed by Nasdaq on May 28, 2021, the plaintiffs’ claim is precluded by the comprehensive regulatory framework Congress established in the Securities Exchange Act of 1934 (“Exchange Act”).
The plaintiffs claim that the Exchanges violated Section 10(b) of the Exchange Act and Rule 10b-5 by offering proprietary data feeds, co-location services, and order types that the plaintiffs allege were used by HFT firms to gain an undisclosed advantage over other investors, including the plaintiffs. Nasdaq notes that the Congress intended the Securities and Exchange Commission (SEC) to supervise “the operation of the securities markets” and to “make the rules regulating those markets.”
According to Nasdaq, allowing the plaintiffs’ claim to proceed would conflict with the text and structure of the Exchange Act and undermine Congress’s intent by permitting private plaintiffs and civil juries to abrogate the SEC’s decisions about how the securities markets should function.
Further, Nasdaq explains that, in order to bring a claim under Section 10(b), a plaintiff must show that a defendant has used a “manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe.” But the plaintiffs cannot do so here because all of the Exchanges’ challenged products and services were approved by the SEC pursuant to its authority under Section 19(b) of the Exchange Act, Nasdaq says.
The SEC’s approval included a finding that the Exchanges’ rules governing the challenged products and services complied with Section 10(b) and Rule 10b-5 and were “designed to prevent fraudulent and manipulative acts and practices.” Products and services governed by rules that the SEC has found were designed to prevent manipulative acts cannot possibly constitute manipulative devices, Nasdaq says.
Nor can Plaintiffs collaterally attack the SEC’s approvals of the Exchanges’ rules by asserting that they failed to disclose the full functionality of their challenged products and services to the SEC or that the SEC failed to understand how those products and services could be used by so-called HFT firms. Objections to the SEC’s rulemaking process must be raised within “the exclusive review scheme Congress devised for such challenges and not in an action in district court.”
Moreover, the SEC has known how HFT firms could use those products and services, according to Nasdaq.
Also, Nasdaq says that Congress gave the SEC, not private plaintiffs, authority to alter or amend the rules of national securities exchanges and other self-regulatory organizations (SROs), and to bring enforcement actions against SROs when they violate the Exchange Act, the SEC’s rules, or their own rules. According to the Exchange, allowing private plaintiffs to challenge SRO rules under Section 10(b)’s general antifraud provision would circumvent Congress’s regulatory framework and undermine the SEC’s authority to regulate SROs.
Nasdaq concludes that the Court should hold that Plaintiffs’ Section 10(b) claim is precluded and grant summary judgment to the Exchanges.
A summary judgment is usually a ruling on the merits of the case in favor of one of the parties. The judgment is issued summarily, that is, without the case reaching a trial.