Yahoo Finance Why ‘Flash Boys’ are here to stay
It’s been called the ‘Flash Boys’ case - and now it might be over, in a flash. Barclays (BCS), along with major U.S. stock exchanges like the Nasdaq (NDAQ), NYSE (ICE), BATS Global Markets, and the Chicago Stock Exchange won dismissal of a suit brought by pension funds and other investors accusing them of rigging the markets. The suit alleged Barclays and the exchanges gave high frequency traders preferred treatment through the use of “complex order types” and access to data feeds of order flow.
These suits were brought right around the time Michael Lewis published Flash Boys: A Wall Street Revolt, where Lewis depicted an exchange and dark pool regime where high frequency traders and Wall Street pros were getting an advantage through front running, latency arbitrage, and a host of other high-speed trading techniques.
Judge Jesse Furman of the Southern District of New York ruled the exchanges were immune from suit because federal law placed the SEC and the Department of Justice in charge of making sure the exchanges played fair.
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As for Barclays, Judge Furman said the plaintiffs had failed to show that they reasonably relied on Barclay’s assertions about the safety of its “dark pool,” known as LX. Plaintiffs alleged that Barclays said the dark pool was “a safe place to trade.” Data from 2014 shows that LX was the second largest dark pool in operation.
“It's a defeat for the legal approach that was taken to try and hold Barclays accountable for what they say is a rigging of its markets,” Yahoo Finance’s Mike Santoli says in the attached video. “But, it's not really necessarily a claim about the entire validity of this idea that some investors, some traders were given privileged access to trading information, to order information on Barclays' platform.”
It’s a tricky situation for the courts, given the SEC has jurisdiction, for the exchanges at least. For Barclays, Santoli feels the plaintiffs had a high bar to meet, and much of what Barclays was doing in its dark pool was technically illegal. “A lot of this hinged on the way Barclays itself allegedly characterized how its dark pool operated,” he notes. “So it's kind of a marketing thing, it's not necessarily that the entire dark pool was run in a way that that was not in accordance with the rules.”
In light of this ruling, Santoli's key takeaway is that high-frequency trading, flash trading, algorithmic trading - whatever you want to call, is likely here to stay. ”It's basically become institutionalized as part of the way the markets operate,” he says. Somebody was always the highest frequency trader, Santoli notes, “whether it was a carrier pigeon or an undersea telegraph” - someone always had the information first.
Santoli points out one of the big problems facing the industry now is the way the “market” is structured, with several exchanges forming a fragmented marketplace. This isn’t satisfactory for anyone, and he believes it should be addressed by the SEC. As for curbs or bans on high frequency trading, Santoli reiterates that ship has already sailed for the SEC. “The idea that you're going to essentially eliminate these very fast opportunists from trying to just grab pennies in front of somebody else, I don't think that's going to happen.”
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