Court Dismisses High-Frequency Trading Lawsuits
On April 28, 2015, the U.S. District Court for the Southern District of New York (the "Court") dismissed all claims in three materially identical lawsuits brought by Harold Lanier on behalf of himself and others. Lanier asserted the claims against a number of exchanges, including BATS Exchange, Inc., the Chicago Board Options Exchange, Inc., NYSE MKT, LLC and the NASDAQ Stock Market (the "Exchanges"). Lanier's claims maintained that the Exchanges were liable for breach of contract under state law for violating their subscription agreements (the "Subscription Agreements") with certain customers ("Regular Subscribers") by making market data available to preferred data customers ("Preferred Customers") more quickly than to Regular Subscribers.
According to Lanier, the Exchanges' practice of providing market data directly to Preferred Customers (for an additional fee) violated Regulation NMS (which according to Lanier was incorporated by reference into the Subscription Agreements) because it resulted in Preferred Customers receiving market data faster than regular subscribers. Generally, market data is distributed according to reporting plans pursuant to which the Exchanges submit market data to a processor that consolidates the data from all of the Exchanges, determines the overall "consolidated" best bid and offer, and then distributes that data (as well as trade data) via the Securities Information Processor to Regular Subscribers. However, according to the court documents, this process can take more than 1,000 microseconds longer to distribute market data than the Exchanges' direct feeds for Preferred Customers.
Because the SEC approved the use of Exchange's direct feeds for Preferred Customers previously, and in light of the comprehensive federal regulatory scheme governing the dissemination of data in the national market system, the Court ruled ultimately that Lanier's claims were preempted by federal law under the doctrines of both conflict and field preemption and were accordingly dismissed. According to Judge Forrest, it is the jurisdiction of the "SEC and not [the] Court [to] determine whether the [Exchanges] have provided information in a manner that violates their obligations under Regulation NMS."
See Dismissal Decision: Lanier v. BATS Exchange Inc., et al.