Courtesy of Pam Martens.
New York Stock Exchange Trading Floor
Financial media is buzzing this week that a Federal District Court Judge for the Southern District of New York, Jesse Furman, has ruled that the City of Providence, Rhode Island, the Plumbers and Pipefitters National Pension Fund, along with other plaintiffs, can move forward with their class action lawsuit against seven stock exchanges, including the New York Stock Exchange and Nasdaq, for allegations that they effectively rigged the market against the small investor.
That sounds like a great David versus Goliath court case is moving right along toward a triumph for justice – until one looks at the gritty details of the case.
The lawsuit was launched five years ago following the publication of the book, Flash Boys, by bestselling author and Wall Street veteran, Michael Lewis. The book mapped out, with eyewitness accounts and extensive detail, how the stock market had been rigged through multiple arrangements between the nation’s stock exchanges and high frequency trading (HFT) firms.
The subsequent lawsuit explained in specific detail how the stock exchanges were allowing the HFT firms to move their computers close to the stock exchanges’ own computers (co-location) to get more rapid execution of their trades than the general public; to obtain a faster price data feed than the one that is available to the public; and to use special order types to enhance the trading manipulation. To further create an unlevel playing field that benefited the high frequency trading firms, the stock exchanges charged enormous sums of money for the co-location and faster data feeds which prevented the public from gaining access. This effectively meant that the high frequency traders could front-run (trade ahead of) the public’s stock orders with advance knowledge of where the prices were headed.
The Securities and Exchange Commission (SEC) had been effectively aiding and abetting the manipulation by rubber-stamping the rule changes as they were submitted by the various exchanges. As we previously reported, in December 2013, the SEC filed this rule change in the Federal Register, which announced that the New York Stock Exchange (NYSE) was changing its pricing for some of its co-location services and computer cabinets for outside users. The NYSE said it would charge “a one-time Cabinet Upgrade fee of $9,200 when a User requests additional power allocation for its dedicated cabinet such that the Exchange must upgrade the dedicated cabinet’s capacity. A Cabinet Upgrade would be required when power allocation demands exceed 11 kWs. However, in order to incentivize Users to upgrade their dedicated cabinets, the Exchange proposes that the Cabinet Upgrade fee would be $4,600 for a User that submits a written order for a Cabinet Upgrade by January 31, 2014…”
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