MANHATTAN (CN) - The nation's pre-eminent stock exchanges cheated investors by letting high speed traders jump the line, manipulating the markets and diverting billions of dollars to themselves, the city of Providence, R.I., claims in a federal class action.
The city claims in its 57-page lawsuit that the scheme began after the onset of the global economic crisis and continues to this day.
To carry out the scheme the defendant exchanges - including, but not limited to the New York and Chicago stock exchanges, and NASDAQ - together with the defendant brokerage and high frequency trading firms - among them, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley and Co., Citigroup, Credit Suisse, and the Charles Schwab Corp. - employed "devices, contrivances, manipulations and artifices to defraud in a manner that as designed to and did manipulate the U.S. securities markets and the trading of equities on those markets," the city says in the complaint.
These "devices and contrivances" included "electronic front-running," essentially early notice of investors' intention to buy or sell securities; "rebate arbitrage," a form of kickback payment; "slow-market arbitrage," playing the price of a stock of one exchange against its price on another; "spoofing," phony cancellation orders intended to game the market at its opening or close; "layering," the issuance of a wave of false orders; and "contemporaneous trading," obtaining nonpublic information regarding the trading intentions of the plaintiffs and then transacting against them, the complaint states.
"Notwithstanding their legal obligations and duties to provide for orderly and honest trading and to match the bids and orders placed on behalf of investors at the best available price, the Exchange Defendants and those Defendants that controlled alternate trading venues demanded and received substantial kickback payments in exchange for providing the HFT [high-frequency trading] Defendants access to material trading data via preferred access to exchange floors and/or through proprietary trading products," the city says.
"Likewise, in exchange for kickback payments, the Brokerage Firm Defendants provided access to their customers' bids and offers, and directed their customers; trades to stock exchanges and alternate trading venues that the Brokerage Firm Defendants knew had been rigged and were subject to informational asymmetries as a result of Defendants' scheme and wrongful course of business, all of which operated to the detriment of plaintiff and the class."
The city claims these predatory practices extended to the defendant brokerages selling special access to material data, including orders made by it and the plaintiff class so that the high frequency trading firms could trade against them using the competitive advantages they had put in place.
The lawsuit comes after financial journalist Michael Lewis's new book, "Flash Boys," made national news with its claim that the markets are rigged for and by high-frequency traders.
The city seeks unspecified damages, restitution of investors' money, and injunctive relief on multiple claims of violations U.S. securities laws, and rules and regulations promulgated by the U.S. Securities and Exchange Commission.
The plaintiffs are represented by Samuel H. Rudman, of Robbins, Geller, Rudman & Dowd LLP, of Melville, N.Y., and Providence City Solicitor Jeffrey M. Padwa.
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