March 29, 2018 / 2:32 PM / in 8 months

New York high-speed firm Tower must face Korean 'spoofing' claims: U.S. court

NEW YORK (Reuters) - A U.S. appeals court on Thursday revived a lawsuit by five Korean traders accusing the New York high-frequency trading firm Tower Research Capital LLC and its founder Mark Gorton of conducting illegal “spoofing” trades at their expense.

The 2nd U.S. Circuit Court of Appeals in New York said Tower’s trades on the Korea Exchange (“KRX”) “night market” for futures contracts might qualify as “domestic” trades, entitling the traders to pursue class-action damages claims under the U.S. Commodity Exchange Act (CEA).

“Plaintiffs’ allegations make it plausible that parties trading on the KRX night market incur irrevocable liability in the United States,” Circuit Judge John Walker wrote.

The 3-0 decision also restored the plaintiffs’ unjust enrichment claims. It overturned a February 2017 ruling by U.S. District Judge Kimba Wood, and returned the case to her.

A lawyer for Tower and Gorton did not immediately respond to requests for comment.

“We are looking forward to prosecuting this case,” the plaintiffs’ lawyer Michael Eisenkraft said in an interview.

High-frequency traders were the subject of Michael Lewis’ 2014 best-seller “Flash Boys.”

Critics say their algorithms give them unfair split-second trading advantages over ordinary investors.

The KRX night market operates when the Busan, South Korea-based exchange is closed. Orders entered in Korea are matched with counterparties by a CME Globex electronic trading platform in Aurora, Illinois. Trades settle the next morning.

According to the complaint, Tower rigged prices of KOSPI 200 futures contracts in 2012, when it made 53.8 percent of all such trades on the night market, by placing and quickly canceling trades or ensuring it was its own counterparty.

The plaintiffs, who traded those contracts, said this created artificial supply and demand, enabling Tower, which was founded in 1998, to sell contracts at inflated prices or buy them at deflated prices.

Citing a 2010 U.S. Supreme Court decision restricting U.S. securities claims based on non-U.S. conduct, Tower said the Korean traders’ lawsuit was properly dismissed because night market trades were settled in their country.

Walker, however, said the Supreme Court said nothing about the CEA, and Tower might have become liable when the trades were “matched,” in Illinois.

“If plaintiffs bought higher or sold lower than they would have absent defendants’ manipulation, defendants would have caused plaintiffs harm and enriched themselves at plaintiffs’ expense,” Walker wrote.

“In our view, the connection between the parties in that situation would not be too attenuated,” he added.

The case is Choi et al v Tower Research Capital LLC et al, 2nd U.S. Circuit Court of Appeals, No. 17-648.

Reporting by Jonathan Stempel in New York; Editing by David Gregorio and Tom Brown

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