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Bloomberg published a fascinating story less than 12 hours ago—it’s fascinating as much for the simple common sense that it omits as for what Bloomberg actually reports—regarding a lawsuit that was just filed against the Chicago Mercantile Exchange (CME) that claims that high-frequency trading inherently rigs the marketplace. (Long story short: If you have access [because you’re paying big bucks for co-located servers that are closest to an exchange] to trading information more quickly than someone on Main Street, you’re enabled to respond to it faster than all of us “muppets” in the unwashed masses, too.)

From Bloomberg

CME Sued on Claims High-Frequency Traders Bought Access
By Andrew Harris and Matthew Leising
Bloomberg
Apr 13, 2014 9:00 PM PT

CME Group Inc. (CME), owner of the world’s largest futures market, was sued by three of its users who alleged the company sold access to order information to high-frequency traders ahead of other market participants.

Traders William C. Braman, Mark Mendelson and John Simms claimed the owner of the Chicago Mercantile Exchange and the Chicago Board of Trade perpetrated “a fraud on the marketplace,” according to a complaint filed April 11 in Chicago federal court.

Scrutiny of high-frequency trading and whether it gives some investors unfair advantage intensified this year amid government probes and the March 31 publication of “Flash Boys” by Michael Lewis. While those examinations have focused mostly on U.S. equity markets, such as dark pools run by banks and exchanges owned by companies including Nasdaq OMX Group Inc., IntercontinentalExchange Group Inc. and Bats Global Markets Inc., high-frequency traders also are active in futures markets.

The lawyer for the three men, Tamara De Silva, said that while the lawsuit wasn’t inspired by the Lewis book, her clients “felt vindicated” by it. De Silva, who didn’t cite any specific instances or evidence of two-tiered access in the complaint, is seeking class-action, or group status, on behalf of all users of real-time futures market data from those exchanges from 2007 until the present…

Here’s “the thing.”  The Chicago Mercantile exchange is claiming they release trade information to everyone at the same time. That’s, probably, technically true. The reality however is that if you’re enabled to process and respond to that information more rapidly than almost everyone else in the market then you’re maintaining a distinct advantage over most others trading in that market, too.  

From the lawsuit (h/t Zero Hedge)…

…Throughout the Class Period, Defendants not only permitted the HFTs to see price and market data, including open orders, market  orders before all other market participants and trader saw the price and market data, they permitted the HFTs to execute trades using this same non public 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.

Throughout the Class Period, 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…

Here’s the entire complaint

  Braman vs CME

Zero Hedge has been all over this story, today (SEE: "CME Sued For Giving 'High-Frequency Traders Peek At Market' Since 2007"), and since, at least, October 2012.


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