Lawsuit: CME aided high-frequency traders

Three traders have accused the world's largest futures market of letting high-frequency traders get an improper advance look at price and market data and execute trades using the data before other market participants.

In a federal lawsuit seeking class-action status, the traders alleged that the CME Group secretly maintained the practice from 2007 through this month and financially victimized an untold number of market participants by engaging in "a fraud on the marketplace."

The traders charged that CME, owner of the Chicago Mercantile Exchange and Chicago Board of Trade, falsely assured all market participants that their exchange fees and data-fees gave them access to financial data "in real time."

But high-frequency traders, equipped with powerful computing equipment that can receive and execute trades on financial data in tiny fractions of a second, got the market information before anyone else, according to the April 11 lawsuit filed in the Northern District of Illinois.

By allowing the procedure and failing to disclose it to all traders, the CME "institutionalized market manipulation and created an opaque and hidden marketplace for financial futures," the lawsuit charged.

The case was filed amid government and regulatory probes examining whether high-frequency traders have an unfair edge over competitors. The investigations have gained increased public focus with last month's publication of "Flash Boys," a critical examination of high-frequency trading by author Michael Lewis.

In response, the CME Group said the lawsuit was "devoid of any facts supporting the allegations" and demonstrated "a fundamental misunderstanding of how our markets operate."

"It is sad when plaintiffs' lawyers bring a suit based on a desire for publicity, and in the rush to file a suit fail to undertake even the most basic effort to determine if there is any basis for their allegations," said the CME Group, calling the case "without merit."

The lawsuit was filed on behalf of fu! tures traders William Braman, Mark Mendelson and John Simms, but seeks class-action status to represent other market participants allegedly damaged by preferential treatment of high-frequency trading.

The action accuses the CME Group of fraud, fraudulent concealment, market manipulation and disseminating false information. It seeks unspecified compensation for financial damages.