Aug 6 Investors have wasted no time making
high-frequency trading, the subject of Michael Lewis' recent
best-selling book "Flash Boys: A Wall Street Revolt," a focus of
securities class-action litigation, according to a study
released on Wednesday.
One of 78 federal securities lawsuits seeking class-action
status and filed between January and June targets the practice,
according to data from Cornerstone Research and the Stanford Law
School Securities Class Action Clearinghouse.
High-frequency traders use computer algorithms to obtain
split-second advantages over other traders, which supporters say
improves market liquidity and critics say can mask manipulation.
Most securities class-action lawsuits target individual
companies, and sometimes top executives and bank underwriters.
But Cornerstone said the trading lawsuit, which combines
five earlier cases, may greatly increase the complexity of
pursuing and defending against securities fraud cases,
especially if businesses as diverse as exchanges, brokerages and
trading firms themselves are among the defendants.
"Daily trading data required to assess allegations in these
cases will not only be voluminous, but will relate to the
interaction of activity among multiple exchanges, dark pools,
broker-dealers, proprietary accounts and customer accounts,"
said John Gould, a Cornerstone senior vice president.
Such complexity is largely absent from the remainder of the
78 lawsuits, a number that grew from 75 in the first half of
2013, but fell short of the 91 filed in the second half.
There were also no new "mega-filings," which occur after the
revelation of bad corporate news allegedly causes $10 billion or
more of market value to be wiped out. That marked the first
six-month period with no such filings since the second half of
Still, Stanford and Cornerstone pointed to two other factors
that may help ensure a steady stream of future class actions.
First, the number of initial public offerings has rebounded
to a pace last seen about a decade ago, a development that could
spur more litigation because newer companies "tend to be
higher-risk" and more susceptible to negative "surprises."
More than 150 companies have gone public in the United
States in 2014, according to Thomson Reuters data.
Second, the U.S. Supreme Court, in a case involving oil
services company Halliburton Co, in June added a new hurdle
requiring plaintiffs to present some evidence earlier in class
action cases. However, it let stand a 1988 precedent that gave
rise to the modern securities class-action industry.
"Had that decision gone the other way, the already low
numbers of class action filings would have been even lower, and
would likely be trending toward zero," said Joseph Grundfest, a
former commissioner of the U.S. Securities and Exchange
Commission who favored overturning the 1988 precedent. He is
also a Stanford law professor and director of the clearinghouse.
(Reporting by Jonathan Stempel in New York; Editing by Bernard