Major Exchanges Seek to Dismiss HFT Suit

Major U.S. stock exchanges have asked a federal judge to dismiss a lawsuit accusing them of costing ordinary investors billions of dollars by rigging markets to benefit high-frequency traders.

Exchanges including Nasdaq <NDAQ.O>, Intercontinental Exchange Inc's <ICE.N> New York Stock Exchange, Bats Global Markets and CHX Holdings Inc's Chicago Stock Exchange said they deserve "absolute immunity" because they regulate themselves, and that only the U.S. Securities and Exchange Commission could review the plaintiffs' claims.

A co-defendant, Barclays Plc <BARC.L>, said the plaintiffs failed to show it intended to fraudulently conceal the use by high-frequency traders of its Barclays LX platform, sometimes called a "dark pool," or that this use caused trading losses.

Andrew Brown, a partner at Robbins Geller Rudman & Dowd representing plaintiffs led by the city of Providence, Rhode Island and four pension funds, did not immediately respond on Tuesday to request for comment.

The dismissal requests were filed late Monday in the U.S. District Court in Manhattan.

They came amid increased scrutiny for high-frequency trading firms, which use computer algorithms to gain split-second trading advantages.

On Oct. 16, the SEC brought its first market manipulation case against such a firm, fining New York-based Athena Capital Research $1 million for using the algorithm "Gravy" to send a blizzard of trades just before the market close.

Athena did not admit wrongdoing. Michael Lewis, in his best-seller "Flash Boys: A Wall Street Revolt" published in March, accused high-frequency trading firms of rigging markets. The firms account for more than half of U.S. stock market trades.

In the Manhattan lawsuit, exchange operators and Barclays were accused of giving high-frequency traders special access to exchange floors and enhanced data feeds, and letting them install computer servers near the exchanges' own.

The plaintiffs said this created an "uneven playing field" that has since April 2009 diverted billions of dollars a year from ordinary investors and led to "billions more" in kickbacks. They seek class-action status and unspecified damages.

In urging dismissal of the case, the exchange operators said the SEC had "expressly authorized" their dealings with high-frequency trading firms, even if it meant faster trading speeds.

They also called disseminating market data a "core regulatory function" of exchanges that could not be challenged in court.

Barclays, meanwhile, said the plaintiffs based their claims on confidential marketing materials they never saw or relied on.

The British bank also accused the plaintiffs of "parroting unproven assertions" made by New York Attorney General Eric Schneiderman in June when he sued Barclays over its dark pool. Barclays has sought to dismiss that lawsuit.

The pension fund plaintiffs are located in Alexandria, Virginia; Boston; the Virgin Islands and Stockholm.

The case is City of Providence, Rhode Island et al v. BATS Global Markets Inc et al, U.S. District Court, Southern District of New York, No. 14-02811.

(Reporting by Jonathan Stempel in New York; Editing by Meredith Mazzilli)