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Class Action High Frequency Trading Suit

A class-action suit has been filed by the city of Providence, Rhode Island, claiming that dozens of exchanges, brokerages and traders illegally allowed high-frequency traders to defraud investors in stock trades.  The lawsuit names 16 securities exchanges, 12 high-speed traders and 14 brokerages, and says that it is brought on behalf of all “public investors who purchased and/or sold shares of stock in the United States between April 18, 2009 and the present.” 

The suit alleges that the high frequency traders colluded with the brokerages and exchanges to manipulate the securities markets, making “billions of dollars annually.”  The alleged misconduct includes trading on non-public information about the nature and size of customers’ trades, obtained through so-called “co-location” of servers near the trading servers maintained by the exchanges.  The suit also alleges electronic front-running of trades through “latency arbitrage,” which occurs when high frequency traders are able to exploit fractions of seconds of difference in the transmission of trade data.  The suit alleges that the “maker-taker” model, adopted to incentivize trades to occur at particular venues, has led to trading for the sole purpose of rebate arbitrage, which the suit alleges has increased costs of stock trades.  The suit also alleges that trading costs have been artificially raised by practices such as spoofing (posting multiple orders in order to induce price changes), and layering (where many orders are placed in an effort to give the impression of high trading interest). 

The action seeks monetary damages and restitution on behalf of all who traded stocks over the past five years, and asks the court to prohibit the trading activity described in the lawsuit.

The full complaint can be found here: