Duffy Tells Senate Futures Markets Are Not Rigged as Futures Traders File Lawsuit Alleging a “Clandestine” Conspiracy

By Pam Martens and Russ Martens: May 14, 2014

Terrence Duffy of the CME Group Testifying Before the Senate on May 13, 2014

Someone is perjuring themselves to Federal officials and that individual(s) should enjoy a nice long sabbatical at the courtesy of the taxpayer, forgoing the staid Armani for the more robust orange jump suit.

Following SEC Chair Mary Jo White’s less than credible testimony to the House Financial Services Committee on April 29 that “the markets are not rigged,” Terrence Duffy, Executive Chairman and President of the CME Group which owns the Chicago Mercantile Exchange, the largest futures exchange in the world, delivered the same message to the Senate Agriculture Committee yesterday.

Duffy testified that “Our market data is sent to everyone at once. While customers have several options in terms of how they can receive data from us, we do not restrict access.  Having multiple connectivity options makes our markets accessible to a broader array of participants.”

That statement stands in stark contrast to a lawsuit filed on April 11 by three futures traders who present breathtaking allegations that the futures market overseen by Duffy has been entering into “clandestine contracts” with high frequency traders who, for a price, are allowed “to see price data and unexecuted order information before anyone else in the financial world.”

Equally stunning, the lawsuit charges that the Chairman and CEO of the CME Group, “repeatedly gave false information to the public, to journalists and the media touting alleged advantages to the presence of HFT for price and liquidity while never mentioning that they were allowing the HFTs to get price information before everyone else and to trade on this price information.”

The lawsuit covers the period from 2007 to 2014 so it is not immediately clear who the individual referred to as Chairman and CEO actually is.

Lawyers who file frivolous or wildly misleading allegations in Federal Court can be sanctioned and fined and suffer serious damage to their legal career. One must therefore assume that the traders have evidentiary support for the eye-popping and detailed charges they are making in their lawsuit, which seeks class-action status.

The case is Braman et al v CME Group Inc et al, and was filed in the U.S. District Court for the Northern District of Illinois. The Civil Docket for the case is #: 1:14-cv-02646 and has been assigned to Judge Charles P. Kocoras.

The CME Group is represented by the Wall Street powerhouse law firm Skadden, Arps, Slate, Meagher & Flom, LLP. Following are excerpts from the lawsuit. (See High Frequency Trading Lawsuit Against CME Group, et al for the full text.)

“At all relevant times, the CBOT and the CME together comprised the world’s largest derivatives exchange and provided what it labeled as real-time price data information on United States debt instruments, agricultural products, energy, equity indexes, foreign exchange rates and metals to the entire financial world.  The CBOT and CME charged exchange fees and data-fees for this real-time price data to market users and the world’s financial marketplace falsely maintaining that the data sold was in real-time…

“Throughout the Class Period, the Defendants held themselves out to the world as providing real-time and bona fide market data when throughout this same period, the Defendants also charged high frequency traders (‘HFTs’) for the ability to see price data and unexecuted order information before anyone else in the financial world, including all the people who had paid and continue to pay the Defendants for seeing the same data first, in real-time.

“Throughout the Class Period, Defendants not only permitted the HFTs to see price and market data, including open orders, market orders before all other market participants and trader saw the price and market data, they permitted the HFTs to execute trades using this same non public data and order information before all other traders and market participants.  In so doing, the Defendants engaged in a fraud on the marketplace, deceptive practice and failed to maintain a marketplace that is free from market disruption and market manipulation…

“Sometime after January 1, 2007, the CBOT and CME began to allow HFTs to get a peak at all orders to buy and sell futures contracts before these orders were reflected in the Book, 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 order information…

“In permitting the HFTs to execute trades ahead of everyone else using the order information of all the Defendants’ other customers, the CME and CBOT, in violation of the CEA and the CFTC’s Regulations, institutionalized market manipulation and created an opaque and hidden marketplace for financial futures.  HFTs act within milliseconds, moving the market price while remaining perfectly hidden.  In allowing the HFTs to use the Defendants’ other customers’ order information to make trading decisions, the Defendants instituted the practice of selectively allowing front-running orders in hundreds and thousandths of a second time increments for the profit of the Defendants and HFTs…

“The unlawful activity alleged herein was by its nature self-concealing.  The hyper-scalping of the HFTs was not reported by the Defendants nor did the Defendants issue time and sales data in millisecond increments.  In fact, the Defendants at no time during the Class Period revealed that they had given the HFTs a first glance at price data.  The CME and CBOT advertised on their websites that faster speed, through the use of co-locating servers at or near the CME and CBOT’s servers makes all marketplace participants equal in terms of speed.  What the Defendants at no time revealed was that the HFTs had a competitive advantage not only of speed, but price — the ability to act on price data before all other market participants, even if the other market participants paid for collocation services.  Nor at any time during the Class Period did the Defendants reveal that they were permitting the HFTs, unlike all other market participants, to trade ahead of everyone else using price information that was not available to anyone other than the HFTs…

“Defendants entered into clandestine contracts with HFTs knowing that the activities of the HFTs would adversely affect all other individuals and entities that utilized the Defendants’ futures contracts — if for no other reason than allowing the HFTs to see and trade ahead of all others created a trading marketplace that would always be skewed in favor of the HFTs and lead to an insurmountable and unfair competitive advantage…

“The Defendants not only actively concealed their fraudulent practice of selling something as instant real-time information despite it not being so, they went out of their way to make false statements about their price data to the public, journalists, market participants, regulators and the media…”

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