City of Providence v. Bats Global Markets, Inc.
878 F.3d 36
2d Cir.2017Background
- Institutional investors sued seven national securities exchanges alleging securities fraud under § 10(b) and Rule 10b-5, claiming exchanges sold products/services that advantaged high-frequency trading (HFT) firms and disadvantaged ordinary investors.
- Challenged products/services: proprietary (faster, more detailed) data feeds, co-location services (reduced latency by housing servers near exchange systems), and complex order types (pre-programmed order behaviors, including “hide-and-light” orders).
- Plaintiffs allege exchanges (1) sold these services at prices excludeive to most investors, (2) failed to disclose full/cumulative effects or selectively disclosed functionality to HFTs, and (3) profited from and helped create a two-tiered market that permitted HFTs to front-run and obtain superior executions.
- Defendants (exchanges) argued lack of subject-matter jurisdiction (administrative scheme), absolute immunity for SRO regulatory actions, and failure to plead a primary § 10(b) violation (at most aiding-and-abetting by providing tools to HFTs).
- The district court dismissed the complaint; the Second Circuit vacated, holding it had jurisdiction, exchanges were not absolutely immune for these commercial activities, and the complaint adequately alleged manipulatory conduct and primary violations to survive Rule 12(b)(6).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Subject-matter jurisdiction | Federal courts may hear private § 10(b) claims challenging exchanges’ deceptive conduct | SEC administrative-review scheme and NMS Rule 608(d) displace district-court jurisdiction for exchange actions | Court: District court has jurisdiction; plaintiffs’ private fraud claims are not precluded by SEC review scheme |
| Absolute immunity for SROs | Exchanges acted as market operators selling commercial products, not as regulators, so no immunity | Exchanges are delegated regulatory entities entitled to absolute immunity when exercising quasi-governmental powers | Court: No absolute immunity for the challenged conduct (proprietary feeds, co-location, order types) because these were commercial/market-operating, not regulatory actions |
| Manipulative/deceptive conduct under §10(b)/Rule10b-5 | Exchanges devised, sold, and failed to disclose features that artificially affected market activity and misled investors | Exchanges disclosed/SEC-approved the services; plaintiffs at best plead disclosure of existence or that HFTs used products to trade faster | Court: Allegations sufficiently plead manipulative/deceptive acts (failure to disclose full/cumulative effects; jump-queue and front-running theories survive pleading stage) |
| Primary liability vs. aiding-and-abetting | Exchanges were co-participants that profited and thus can be primary violators | Exchanges only provided tools enabling HFT firms; private aiding-and-abetting liability is not allowed under §10(b) | Court: Complaint plausibly alleges exchanges committed manipulative acts and participated in a fraudulent scheme, so primary liability adequately pleaded |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (determining pleading/causation standards in securities fraud context)
- Santa Fe Indus. v. Green, 430 U.S. 462 (defining manipulative or deceptive conduct as practices intended to mislead investors by artificially affecting market activity)
- Stoneridge Inv. Partners, LLC v. Scientific‑Atlanta, 552 U.S. 148 (discussing primary violators versus secondary actors in §10(b) law)
- Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (holding no private aiding‑and‑abetting liability under §10(b))
- ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (pleading requirements for manipulative schemes in this circuit)
- DL Capital Group v. Nasdaq Stock Market, Inc., 409 F.3d 93 (SRO absolute immunity when acting in regulatory capacity)
- In re NYSE Specialists Securities Litig., 503 F.3d 89 (absolute immunity where SRO acted in supervisory/disciplinary role)
- Fezzani v. Bear, Stearns & Co., 716 F.3d 18 (clarifying primary violator concept in securities fraud)
- Wilson v. Merrill Lynch & Co., 671 F.3d 120 (market not misled where terms fully disclosed)
- Litwin v. Blackstone Group, L.P., 634 F.3d 706 (pleading standards and inferences on motion to dismiss)