Labaton Sucharow Defeats Motion to Dismiss in High Frequency Trading Securities Class Action

Labaton Sucharow, as co-lead counsel, has defeated a renewed motion to dismiss claims against seven U.S. stock exchanges alleging that the defendant exchanges provided distinct products and services to high-frequency trading (HFT) firms that manipulated the market in favor of the HFT firms at the expense of ordinary investors.       

This victory comes after plaintiffs successfully revived the suit in December 2017, when the Second Circuit Court of Appeals reversed the Southern District of New York’s 2015 order dismissing the complaint on grounds that the exchanges have absolute immunity from investor claims. 

The Second Circuit held that the exchanges are only afforded immunity where they are fulfilling their “quasi-governmental role” as regulators and that their actions creating, promoting, and selling services that catered to HFT firms are “wholly divorced from the exchanges’ role as regulators.”

The Second Circuit further held that plaintiffs had “sufficiently pled that the exchanges created a fraudulent scheme that benefited HFT firms and the exchanges, sold the products and services at rates that only the HFT firms could afford, and failed to fully disclose to the investing public how those products and services could be used on their trading platforms.”

On May 28, 2019, the Southern District of New York denied the defendant exchanges’ renewed motion to dismiss in its entirety, reasoning that plaintiffs had successfully alleged standing, reliance, scienter, and loss causation.

Significantly, the Court held that plaintiffs’ allegations raised a “cogent and compelling” inference that the defendant exchanges had acted with scienter, where plaintiffs alleged that the exchanges developed a mix of products and services “for and at the behest of their preferred HFT customers,” the exchanges knew the HFT firms would use those products and services to “manipulate prices and exploit” investors, the exchanges “came to understand the exploitative potential of this mix of services,” and the exchanges “began aligning their interests with those of the HFT firms, including enabling predatory HFT strategies.”

The case is In re Barclays Liquidity Cross and High Frequency Trading Litigation, No. 14-md-2589.  The Labaton Sucharow team, which includes Partners Thomas A. Dubbs, Louis Gottlieb, and Thomas G. Hoffman, Jr., represents co-lead plaintiff Boston Retirement System.