A federal appeals court said Tuesday that a lawsuit accusing stock exchanges of defrauding investors by favoring high-speed traders can go forward, in a blow to the New York Stock Exchange and Nasdaq Inc. NDAQ, -1.12%
The two firms were among four U.S. stock-exchange operators whose units are named as defendants in the lawsuit. They have denied allegations that the exchanges favor high-frequency trading, or HFT firms, over slower-moving investors. HFT firms use powerful computers and ultrafast network connections to trade large volumes of stocks.
The class-action case grew out of a lawsuit filed in 2014 by the city of Providence, R.I., after the publication of Michael Lewis’s best-seller “Flash Boys,” which accused high-frequency traders of exploiting ordinary investors.
Tuesday’s decision by the U.S. Court of Appeals for the Second Circuit reversed a 2015 ruling in which a federal district judge threw out the city’s lawsuit. In that ruling, Judge Jesse M. Furman of the Southern District of New York agreed with the exchanges’ argument that they were immune to such lawsuits. Now, the case is being sent back to federal district court. A panel of federal appeals judges ruled on Tuesday that the exchanges “are not entitled to absolute immunity.”
An expanded version of this report appears on WSJ.com.
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