The Securities and Exchange Commission (SEC) is looking to enact new regulations to curb system-abusing high frequency trading (HFT) in U.S. stock markets, but even quick regulatory actions may be too late to prevent cases against these stock exchanges from making it to court.
Eight legal firms have proposed a class action lawsuit against 13 different stock exchanges and subsidiaries in the Southern District of New York, claiming that the exchanges did not do enough to protect the general trading public from the manipulations of high-frequency traders. The court document, submitted on May 22, says that this “is a case about broken promises.”
Michael Lewis, the lawyer who helped orchestrate a $368.5 billion award from a class action suit against the tobacco industry in 1994, told The Guardian that he and others involved with this newest proposed class action believe that the information given to the public “was not timely or accurate, and wasn't fairly distributed.”
“The illusory market – the market that the investor sees when he looks at his monitor – is anywhere from 1,500 to 900 milliseconds old,” Lewis said. “That doesn't sound like much, because the blink of an eye is 300 milliseconds. But that's a long, long time in the world of HFT.”
The stock exchanges have not filed a formal response to the lawsuit, but one can imagine that their in-house legal teams are busy. More lawsuits are expected, and on top of previously announced SEC investigations into the practice of HFT, the State of Rhode Island has also filed suit, charging multiple stock exchanges with fraud.
In speaking on changing stock market regulations, SEC Chair Mary Jo White claims that the Commission wishes to curb “aggressive, destabilizing trading strategies in vulnerable market conditions.” White also claimed that “[m]any market structure rules and industry practices were developed with manual markets in mind. They cannot be expected to optimally address all of today’s market practices.”
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