Pension Funds Sue Exchanges Over High-Frequency Trading

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A handful of pension funds have joined a lawsuit against Nasdaq and other major stock exchanges, alleging that the exchanges favored high-frequency traders and in the process hurt other investors, including pension funds. From the New York Times:

The pension funds, including one in Boston and another in Stockholm, have joined a lawsuit originally filed by Providence in April, according to a filing in U.S. District Court in New York last week. They are taking aim at some of the biggest stock exchanges – including the New York Stock Exchange, Nasdaq and BATS Global Markets – as well as the investment bank Barclays, which operates a private stock trading venue known as a dark pool.

Their legal action comes during a period of heightened scrutiny for high-frequency traders, which use computer algorithms to buy and sell shares in milliseconds. In recent months, Washington lawmakers have summoned financial executives to testify about high-frequency trading, the Securities and Exchange Commission has stepped up its scrutiny of the practice, and the New York state attorney general, Eric T. Schneiderman, has sued Barclays over high-frequency traders in its dark pool.

The pension funds and Providence, which are seeking class-action status, claim the exchanges ran afoul of their legal duties by providing certain advantages to high-frequency traders, “diverting billions of dollars annually from buyers and sellers of securities and generating billions more in ill-gotten kickback payments.” They are seeking an unspecified amount of damages.

Spokesmen for the defendants, which also include the Chicago Stock Exchange, all declined to comment.

Stock exchanges offer a number of paid services used by high-frequency traders, including detailed data feeds, special types of orders and the ability to place computer servers in the exchanges’ data centers. The lawsuit argues that such practices hurt other investors, and it claims the exchanges have a “financial incentive to create an uneven playing field.”

The pension funds that joined the lawsuit include the Employees’ Retirement System of the Government of the Virgin Islands; the State-Boston Retirement System; the Plumbers and the Pipefitters National Pension Fund in Alexandria, Virginia.


Photo by Terence Wright via Flickr CC License