CME Gave High-Frequency Traders Peek at Market, Lawsuit Claims

Apr 13, 2014 4:22 pm ET

April 13 (Bloomberg) -- CME Group Inc., owner of the world’s largest futures market, was sued by users who allege the company sold order information to high-frequency traders ahead of other market participants.

The Chicago-based company, owner of the Chicago Mercantile Exchange and the Chicago Board of Trade, offers futures based on interest rates, equity indexes, currencies, energy products and agricultural commodities. The plaintiffs, in their complaint against CME and CBOT, allege “a fraud on the marketplace” and seek class-action status on behalf of exchange users. CME denied their accusations in a statement.

Sometime after the start of 2007, the CBOT and CME began letting HFTs peek “at all orders to buy and sell futures contracts before they were reflected” to the rest of the market, according to the complaint filed April 11 in federal court in Chicago. That glimpse occurred “before the person or entity entering the buy or sell order received confirmation that their order was received -- in other words before anyone other than the HFTs were privy to this information.”

The debate over whether lightning-fast trading gives some investors an unfair advantage reignited 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.

‘Fundamental Misunderstanding’

“The suit is devoid of any facts supporting the allegations and, even worse, demonstrates a fundamental misunderstanding of how our markets operate,” CME Group said in an e-mailed statement. “It is sad when plaintiffs’ lawyers bring a suit based on a desire for publicity, and in the rush to file a suit fail to undertake even the most basic effort to determine if there is any basis for their allegations. The case is without merit, and we intend to defend ourselves vigorously.”

The lawsuit alleges CME Group gave high-frequency traders early access and that trades from that exclusive advance notice changed prices for everyone else. The plaintiffs had paid for real-time data, according to the complaint.

CME Group “invited HFTs to make trades ahead of all other market participants and because the HFTs’ generally entered very large orders, they had the ability through their de facto inside trading to influence the price of financial futures artificially,” according to the complaint.

Anita Liskey, a CME Group spokeswoman, said that wasn’t true and that the exchange only offers one data feed with its prices that all investors get at the exact same time.

“We have only one data feed, no one can buy it to be faster than anyone else,” she said. “No trader can see any other person’s order until it hits the order book, when it is made public.”

Lead plaintiff William Charles Braman and two other people are suing on behalf of all users of real-time futures market data and futures contracts listed on the CBOT and CME from 2007 to now, according to their complaint.

The case is Braman v. CME Group Inc., 14-cv-2646, U.S. District Court, Northern District of Illinois (Chicago).