In re Barclays Liquidity Cross & High Frequency Trading Litig.

390 F.Supp.3d 432

IN RE BARCLAYS LIQUIDITY CROSS AND HIGH FREQUENCY TRADING LITIGATION

This Document Relates to All Remaining Open Actions (14-CV-2811, 14-CV-3133, and 14-CV-3608)

14-MD-2589 (JMF)

United States District Court, S.D. New York.

Signed May 28, 2019

OPINION AND ORDER

JESSE M. FURMAN, United States District Judge:

In this multidistrict litigation, familiarity with which is presumed, investors allege that seven stock exchanges (the "Exchanges") are violating the federal securities laws by providing services to high-frequency trading ("HFT") firms in a way that amounts to actionable "market manipulation." In particular, the investors argue that by providing (or selling) HFT firms services that allow those firms to execute allegedly harmful trading strategies more successfully (thus harming the investors), the Exchanges have engaged in conduct that adds up to an unlawful manipulative scheme under Securities and Exchange Commission ("SEC") Rule 10b-5 and are therefore liable under Section 10(b) of the Securities Exchange Act of 1934. In 2015, this Court dismissed each of the consolidated cases in its entirety. (Of particular relevance here, the Court found that the Exchanges' alleged conduct did not rise to the level of unlawfully "manipulative" acts and that the Exchanges were protected from these lawsuits by a quasi-governmental immunity.) After some (but not all) of the plaintiffs appealed the dismissal of some (but not all) of their claims, the Court of Appeals ruled in favor of those plaintiffs and remanded to this Court for further consideration. The remaining defendants — the Exchanges — now move to dismiss what remains of the cases, renewing several of their original arguments. Given the Court of Appeals' ruling, and the standards applicable at this stage of the litigation, the Court concludes that Plaintiffs allege sufficient facts to survive the Exchanges' renewed motion to dismiss. Accordingly, the Court denies Defendants' motion.

BACKGROUND

The following facts are drawn from the allegations in the Second Consolidated Amended Complaint ("SAC" or the "Complaint") — which the Court must accept as true for purposes of this Rule 12(b)(6) motion — and the "other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss," including documents attached to the Complaint, statements or documents incorporated into the Complaint by reference, and matters of which judicial notice may be taken. Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007).

In four actions originally filed in this District, various investors (collectively, "Plaintiffs") brought claims under Sections 6(b) and 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78a et seq. , against (as relevant here) seven stock exchanges — BATS Global Markets, Inc., Chicago Stock Exchange, Inc., Direct Edge ECN, LLC, New York Stock Exchange, LLC, NYSE Arca, Inc., Nasdaq OMX BX, Inc., and the Nasdaq Stock Market LLC (collectively, the "Exchanges") — and two Barclays entities, Barclays PLC and Barclays Capital, Inc. (collectively, "Barclays").¹ In a fifth action filed in the Central District of California and later consolidated here by the Judicial Panel on Multidistrict Litigation ("JPML"), Plaintiff Great Pacific Securities ("Great Pacific") brought California-law claims against Barclays.²

The Court has already summarized the facts relevant to these lawsuits and, thus, will not repeat them at great length here. See In re Barclays Liquidity Cross & High Frequency Trading Litig . ("In re Barclays LX "), 126 F. Supp. 3d 342, 348-53 (S.D.N.Y. 2015). Of particular relevance to the claims that remain are three services that the Exchanges sell to HFT firms:

proprietary data feeds, "co-location" services, and "complex order types."

The proprietary data feeds at issue here are certain "enhanced" or "direct" data feeds that the Exchanges offer as a subscription service to certain customers. See Docket No. 252 in 14-CV-2811 ("SAC"), ¶¶ 118-31. In general, they provide better or faster (or better and faster) data to customers who are willing to pay extra for it. All investors seeking to trade on the Exchanges have access (as they must) to a "consolidated" data feed that includes (1) the price at which the latest sale of each stock traded on the Exchanges occurred, the size of that sale, and the exchange on which it took place; (2) the current highest bid and lowest offer for each stock traded on the Exchanges, along with the number of shares available at those prices; and (3) the highest bid and lowest offer currently available across all the Exchanges and the exchange or exchanges on which those prices are available. See In re Barclays LX , 126 F. Supp. 3d at 349. Customers who pay for enhanced and direct data feeds receive more information, more quickly: Some such data feeds, for example, offer access to a greater "depth[ ] of order book information," meaning that instead of the single best bid and offer for a given stock on a given exchange, an exchange may provide information about every bid and offer for a given stock through an enhanced data feed. SAC ¶ 126. Further, because the Exchanges transmit these enhanced data feeds directly to subscribers, those subscribers typically receive the data (including the "core" data included in the consolidated feed) before the consolidated feed — which must first assemble information out of the raw data received from each contributing exchange — reaches other investors. SAC ¶¶ 118, 124.

Next, "co-location" services involve the Exchanges' practice of selling HFT firms the right to place their servers in close physical proximity to the Exchanges' own servers. By shortening the physical distance that trading signals have to travel, HFT firms are able to send trading signals to the Exchanges at faster speeds. SAC ¶¶ 108-09.

Finally, the Exchanges offer customers certain complex "order types," which are "preprogrammed commands" that instruct an exchange how to handle a customer's buy and sell orders. More familiar, and standard, order types might instruct an exchange simply to execute a trade at the current market price (a "market order"), or to buy at or below — or sell at or above — a particular price (a "limit order"). Complex order types, by contrast, can involve more involved and customized steps. For example, a "hide-and-light" order, once placed, remains hidden from all observers on a given exchange — until, that is, the stock that is the subject of the order reaches a particular price, at which point the "hide-and-light" order "lights," appearing at the front of the order queue just in time to execute a trade at that price before other limit orders that may have lost their place in line as the price moved away from them. SAC ¶¶ 136, 152-56; In re Barclays LX , 126 F. Supp. 3d at 351-52.

The gravamen of Plaintiffs' Section 10(b) claim is that the Exchanges developed these products and services, sold them to HFT firms — whose technology enabled them to employ the services in allegedly manipulative schemes at investors' expense — and failed to fully disclose these facts to those investors, including Plaintiffs. Plaintiffs allege that, as a result, they were induced to trade based on artificial price signals, only to see their trades execute at worse prices than advertised, and that the Exchanges' role in that overall scheme makes them liable to Plaintiffs under Section 10(b) and Rule 10b-5. In re Barclays LX , 126 F. Supp. 3d at 353-54.³

In 2015, this Court dismissed Plaintiffs' claims in their entirety. See In re Barclays LX , 126 F. Supp. 3d at 355-75. The Court dismissed all claims against the Exchanges on the alternative and overlapping grounds that (1) the Exchanges were absolutely immune from liability for the conduct alleged, id. at 355-60 ; (2) Plaintiffs had failed to plead a manipulative act under Section 10(b) or any "primary" (as opposed to secondary, or "aiding-and-abetting") violations of the statute, id. at 361-62 ; and (3) Section 6(b) does not provide a right of action to private plaintiffs, id. at 362-63. The Court dismissed all of Plaintiffs' claims against Barclays on the grounds that (as with the Exchanges) Plaintiffs had failed to plead any manipulative acts or "primary" violations by Barclays, id. at 364, and, alternatively, that Plaintiffs had not adequately alleged any reasonable reliance on Barclay's alleged misrepresentations, id. at 365-66. Finally, the Court dismissed Great Pacific's state-law claims against the Exchanges and Barclays for failure to state a plausible claim for relief. Id. at 367-75.

Plaintiffs appealed the dismissal of their Section 10(b) claims — but not the dismissal of their Section 6(b) claims — against the Exchanges. See City of Providence, R.I. v. BATS Global Mkts., Inc. , 878 F.3d 36, 43 n.3 (2d Cir. 2017), cert. denied , ––– U.S. ––––, 139 S. Ct. 341, 202 L.Ed.2d 255 (2018). Nor did Plaintiffs appeal the dismissal of any of their claims against Barclays. Id. at 40 n.2. (Great Pacific, which had brought claims only against Barclays, did not appeal at all — at least not in this Circuit. See Docket No. 56.)⁴ The Court of Appeals vacated the Court's judgment dismissing Plaintiffs' claims against the Exchanges, holding that the Exchanges were not absolutely immune from liability for the conduct alleged, City of Providence , 878 F.3d at 45-48 ; that Plaintiffs had adequately pled manipulative acts under Section 10(b), id. at 49-51 ; and that those allegations amounted to a "primary violation" of the statute, id. at 51-52. The Court of Appeals did not, however, address any of the Exchanges' remaining arguments for dismissal, id. at 52, which this Court had not addressed in its earlier decision, see In re Barclays LX , 126 F. Supp. 3d at 361 n.6. Instead, the Circuit remanded the case for further proceedings, leaving it to this Court to consider those arguments in the first...