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Class Action Takes Aim at High Frequency Traders on Chicago Derivatives Exchanges

CHICAGO (CN) - Chicago derivatives exchanges sold price data and unexecuted order information to high-frequency traders "before anyone else in the financial world," even before subscribers to its "real-time" data service, allowing high frequency traders to trade on nonpublic information, a class action claims in Federal Court.

William Braman, Mark Mendelson and John Simms filed a class action against the CME [Chicago Mercantile Exchange] Group, and Chicago Board of Trade (CBOT).

"At all relevant times, the CBOT and the CME together comprised the world's largest derivatives exchange and provided what it labeled as real-time price data information on United States debt instruments, agricultural products, energy, equity indexes, foreign exchange rates and metals to the entire financial world. The CBOT and CME charged exchange fees and data-fees for this real-time price data to market users and the world's financial marketplace falsely maintaining that the data sold was in real-time," the complaint states.

But Braman et al. claim that at the same time, CME and CBOT "also charged high frequency traders (HFTs) for the ability to see price data and unexecuted order information before anyone else in the financial world, including all the people who had paid and continue to pay the defendants for seeing the same data first, in real-time."

High frequency trading uses powerful computers to transact a large number of trades at extremely fast speeds, capitalizing on small percentage changes in market value faster than any human trader could do. It is the subject of "Flash Boys," a widely reported new book by financial journalist Michael Lewis, who contends in it, without mincing words, that the market is rigged for high-frequency traders.

High frequency traders make up at least 50 percent of the trading volume on U.S. stock exchanges, according to the New York Times.

According to the class action, from 2007 to 2014, "Defendants not only permitted the HFTs to see price and market data, including open orders, market orders and orders entered by class members before all market traders and people who traded in United States debt instruments listed on the CME and CBOT saw the price and market data, they permitted the HFTs to execute trades using this same 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.

"The defendants concealed the fact that they were not providing real-time price information and data by continuing to charge fees to all non-HFTs for real-time data and price information.

"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."

Plaintiffs seek an injunction preventing the exchanges from charging fees for real-time futures market data, and prohibiting high-frequency traders from executing trades based on nonpublic information.

They also want a refund of all fees paid during the class period, and creation of a trust for defendants' ill-gotten gains.

The class is represented by R. Tamara de Silva, with assistance from Michael O'Rourke with Moody & O'Rourke.

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