CME Sued For Giving "High-Frequency Traders Peek At Market" Since 2007

Tyler Durden's picture

Now that both the FBI and the DOJ have woken up from a half-decade slumber realizing there was riggedness, RIGGEDNESS going on in these here stock markets courtesy of Michael Lewis' book, it wasn't long before those most impacted by the frontrunning strategies of HFTs spoke up - anyone who has lost money in the stock market since Reg NMS was conceived.

Of course, said loss could have been the loss of many other factors - such as the market being rigged by the Fed as opposed to vacuum tubes - but since nobody really know much if anything about how HFTs operate, it is rather convenient to scapegoat anything and everything that ever went wrong with one's P&L on algorithms.

Sure enough, in a lawsuit that was just filed by lead plaintiff William Charles Braman, seeking class-action status, and filed on behalf of all users of real-time futures market data and futures contracts listed on the CBOT and CME from 2007 to now, the CME is allegd to have sold order information to high-frequency traders ahead of other market participants.

Specifically, from the lawsuit:

Throughout the Class Period, Defendants not only permitted the HFTs to see price and market data, including open orders, market  orders before all other market participants and trader saw the price and market data, they permitted the HFTs to execute trades using this same non public data and order information before all other traders and market participants. In so doing, the Defendants engaged  in a fraud on the marketplace, deceptive practice and failed to maintain a marketplace that is free from market disruption and market manipulation.

 

Throughout the Class Period, the Defendants concealed the fact that they were not providing a marketplace free of market manipulation because they were allowing the HFTs to trade based upon non-public information, specifically, the non-published and unexecuted orders of all other users of the CME and CBOT. In so doing, the Defendants failed to provide a marketplace that is free from market manipulation and established an unequal and two-tiered marketplace all the while inviting and soliciting the use of its financial trading instruments for profit.

Well, duh. Apparently it took the general public a Michael Lewis book to reread out post from October 2012 in which we showed that an estimated over 30% of CME revenues were made from HFT - in other words from selling proprietary data in direct feeds to high-paying subscribers, that hits collocated servers ahead of the consolidated tape.

But the punchline is that this is not illegal per se. Why? Because the regulators, in all their corrupted and captured brilliance, allowed it!

Bloomberg has more:

The Chicago-based company, owner of the Chicago Mercantile Exchange and the Chicago Board of Trade, offers futures based on interest rates, equity indexes, currencies, energy products and agricultural commodities. The plaintiffs, in their complaint against CME and CBOT, allege “a fraud on the marketplace” and seek class-action status on behalf of exchange users. CME denied their accusations in a statement.

 

Sometime after the start of 2007, the CBOT and CME began letting HFTs peek “at all orders to buy and sell futures contracts before they were reflected” to the rest of the market, according to the complaint filed April 11 in federal court in Chicago. That glimpse occurred “before the person or entity entering the buy or sell order received confirmation that their order was received -- in other words before anyone other than the HFTs were privy to this information.”

 

The lawsuit alleges CME Group gave high-frequency traders early access and that trades from that exclusive advance notice changed prices for everyone else. The plaintiffs had paid for real-time data, according to the complaint.

 

CME Group “invited HFTs to make trades ahead of all other market participants and because the HFTs’ generally entered very large orders, they had the ability through their de facto inside trading to influence the price of financial futures artificially,” according to the complaint.

So does the NY Fed by trading through Citadel. And? One doesn't see either Bill Dudley or Ken Griffin in court. Of course, the CME knows, sees, hears and certainly trades no evil.

“The suit is devoid of any facts supporting the allegations and, even worse, demonstrates a fundamental misunderstanding of how our markets operate,” CME Group said in an e-mailed statement. “It is sad when plaintiffs’ lawyers bring a suit based on a desire for publicity, and in the rush to file a suit fail to undertake even the most basic effort to determine if there is any basis for their allegations. The case is without merit, and we intend to defend ourselves vigorously.”

 

Anita Liskey, a CME Group spokeswoman, said that wasn’t true and that the exchange only offers one data feed with its prices that all investors get at the exact same time.

 

“We have only one data feed, no one can buy it to be faster than anyone else,” she said. “No trader can see any other person’s order until it hits the order book, when it is made public.”

Still, while this particular case will likely be promptly forgotten as rigged as it may be, the market and its HFT parasites operated largely in the confines of the law, we will be following Braman vs CME closely if only for discovery purposes - we eagerly look forward to finally getting a factual glimpse under the skirt of the vacuum tubes.

Full amended complaint below: