In 1994 a lawyer did what most thought was impossible: he took on big tobacco on behalf of the state of Mississippi and won a record $368.5 billion judgment paid out by the 13 biggest tobacco companies to cover the cost of treating illnesses related to smoking. 20 years later he is trying the impossible again, this time launching a class action lawsuit against High Frequency Traders, and specifically 13 stock exchanges and subsidiaries on behalf of Harold Lanier "individually, and on behalf of all others similarly situated". Ironically, the lawyer behind the lawsuit is also named Michael Lewis, no relation to the famous author whose book simplifying just how rigged the market has become as a result of HFT (and of course the Fed, but that is the topic of the forthcoming "Liberty 33 Boys").
And while most comparable lawsuits have been mocked because the HFT lobby (understandably) believes that no jury of non HFT peers can ever "grasp" the sophisticated predation and parasitism that is HFT, Lewis simplifies it: "This is a case about broken promises," the 40-page document begins. It is signed by eight different lawfirms, mostly from the south, which in recent years seem to have the most luck in explaining complex things to simple people. It is also just the first of many comparable lawsuits that will be filed in the coming weeks, now that the anti-HFT crusade has such a prominent participant as the many who extracted a a third of a trillion from big tobacco. Because if he smells blood, so will every one else.
From the lawsuit:
This case is about broken promises. Plaintiff Harold Lanier, and other Subscribers, (collectively “Subscribers”) entered into Contracts with the defendants, all of which are securities exchanges (“Exchange Defendants”), to receive electronic market data services offered by the Exchange Defendants. The Exchange Defendants promised to be fair by: (1) providing the market data service in a non-discriminatory manner; and (2) providing the Subscribers with “valid” data (i.e., the actual data that is accurate and not stale). The Exchange Defendants did not live up to either promise.
First, the Exchange Defendants failed to live up to their promise to provide Subscribers with the market data in a non-discriminatory manner. In an effort to increase their profits, the Exchange Defendants entered into lucrative side deals with certain customers to whom the Exchange Defendants sold advance access to the market data that Subscribers had contracted for through (1) direct feeds (“Private Feeds”) and (2) co-location services (“Preferred Data Customers”). As detailed in Section IV.C. of this Complaint, for a price, the Exchange Defendants provided access to the data to Preferred Data Customers through arrangements that guaranteed they would receive the data substantially in advance of the Subscribers.
Unbeknownst to Subscribers, these side deals resulted in Subscribers receiving data that was obsolete because the Preferred Data Customers had advance access to the data.
Second, the Exchange Defendants failed to live up to their promise to provide Subscribers with valid data. The validity of the data is what made the electronic data services offered by the Exchange Defendants valuable to the Subscribers. But by entering into the side deals with the Preferred Data Customers, the Exchange Defendants effectively provided to Preferred Data Customers the data that Subscribers had paid for, while giving Subscribers data that was stale. In other words, as a result of the side deals, the Exchange Defendants deprived the Subscribers of the fundamental benefit of their Contracts, i.e., fair access to valid data. Plaintiff and the other Subscribers thereby suffered injury and damage as a result of the Exchange Defendants’ conduct.
* * *
This Complaint alleges ordinary state law claims, the crux of which revolve around the sale of stale data to Plaintiff. In other words, the gravamen of Plaintiff’s Complaint is that the services he purchased from the Exchange Defendants (specifically, the data provided through the exchanges) were not delivered as promised. This Complaint does not involve any claims regarding the purchase or sale of securities or investors’ losses, nor does Plaintiff seek any relief related to the purchase or sale of any security.
And an interesting excerpt from the lawsuit framing the concept that is the crux of the issue: time.
The Significance of Time in the Financial World
Market data is purportedly made available to the Processor and Preferred Data Customers at the same time. However, the Exchange Defendants actually transmit the data to Preferred Data Customers before they send the same data to the Processor, such that the data arrives at the Processor well over a thousand microseconds later than the same data distributed over faster channels reaches the Preferred Data Customers. This does not even account for the additional time required to subsequently transmit the data from the Processor to the Subscribers.
In human perception, those microseconds might appear unimportant, far less time than the blink of an eye. But in today’s financial markets, one thousand microseconds is a virtual eon. And given that it only takes the Preferred Data Customers a handful of microseconds to cancel orders and execute trades, it is more than enough time for them to generate tremendous profits from the advance receipt of the market data.
The illustration below shows the flow of market data from the exchanges to both Subscribers (through the Processor) and to Preferred Data Customers. Through the use of high speed Private Feeds and co-location services, the Preferred Data Customers can receive the data in as little as one microsecond and can begin acting on the data immediately. Meanwhile, due to the (1) size of the connection of the feed between the Exchanges and the Processor, (2) the procedure involved in transmitting data between the Exchanges and the Processor, and (3) the co-location of Preferred Data Customers’ computer servers with the Exchanges’ servers, the data for Subscribers is still en route from the Exchanges to the Processor long after the Preferred Data Customers have received, and acted on, the information to their advantage. On average, the data is received by the Processor approximately 1,499 microseconds after the Preferred Data Customers receive it. The Processor then aggregates the data and only then is it disseminated to the Subscribers.
Much more in the full lawsuit below, which we urge HFTs to read because very soon they will have to explain to a jury of Joe Sixpacks just why what they do is "fair".