CME High Frequency Trading Claim: Really?

Chidem Kurdas

If the allegations made in the lawsuit filed April 11th by three traders against CME are true, then executives of the exchange who can be shown to be involved should face criminal charges.

Were these claims – that the huge futures exchange facilitated front-running by high-frequency traders – proven, the fraud perpetrated upon the market could be much more significant than any advantages high-frequency traders get from equity trading niches known as dark pools, for instance. And it would indicate probably greater damage than caused by insider trading, the issue that has of late so exercised regulators.

But the complaint, while arguing vigorously to be designated a class action suit, provides no specific information as to the who, when, where and why.

It alleges that the CME “charged high-frequency futures traders for the ability to see price data and unexecuted order information before anyone else in the financial world,” and then allowed them to trade on this information.

This allegedly happened sometime between January 2007 and this April 10th—the day before the complaint was filed. That’s a period of seven years and three months. Did it happen throughout this lengthy period? Did it happen just a few times? Not specified.

The first question, as the complaint says, is “whether the manipulative activities alleged herein existed.” In fact there is a list of some 10 questions, without any answers.

The lawyers filing the suit may intend to present specific information and evidence once they succeed in getting it certified as a class action for potentially tens of thousands of futures traders. Until then, however, it is impossible to know whether the charges should be taken seriously.

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