High Frequency Trading (HFT), a practice explained in detail by Michael Lewis’ book “Flash Boys: A Wall Street Revolt,” recently attracted the scrutiny of U. S. Attorney General Eric Holder, the Securities and Exchange Commission and the Commodities Futures Exchange Commission. HFT has now attracted a class action, as well. On April 18, 2014, the City of Providence, RI filed a proposed securities class action against 14 brokerages, 16 securities exchanges and 12 high-speed traders in behalf of all public investors who purchased/sold shares of stock in the U. S. from April 18, 2009 to April 18, 2014 on a registered public stock exchange, or a U.S.-based alternate trading venue, who claim injury from the defendants’ actions in high frequency trading (HFT).
Filed in Manhattan federal district court, the suit alleges that the defendants fraudulently manipulated the market by electronic front-running, rebate arbitrage, spoofing and contemporaneous trading, diverting “billions of dollars annually from buyers and sellers of securities to themselves.” As Lewis’ book explained electric front-running, high-frequency traders intercept a regular stock trader’s order to buy or sell, and then buy or sell mere milliseconds before the intercepted order, thereby raising the stock price before the intercepted order can be completed and profiting from the investors who made the original orders.
The defendant stock exchanges include those operated by BATS Global Markets Inc, Chicago Board Options Exchange, NASDAQ OMX Group Inc. and Intercontinental Exchange’s New York Stock Exchange. High-speed trader defendants include Virtu Financial, Inc., and defendant brokerages include Bank of America Corp, JPMorgan Chase & Co., Citigroup, Inc., Morgan Stanley and Citadel. None of the defendants has initially commented on the suit.
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