Lanier v. Bats Exch., Inc.

• Decision Date: 28 April 2015
• Docket Number: 14–cv–3865 KBF,Nos. 14–cv–3745 KBF,14–cv–3866 KBF.,s. 14–cv–3745 KBF
• Parties: Harold R. LANIER, on behalf of himself individually and on behalf of others similarly situated, Plaintiff, v. BATS EXCHANGE, INC., BATS Y–Exchange, Inc., Chicago Board Options Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., International Securities Exchange, LLC, Nasdaq OMX BX, Inc., Nasdaq OMX PHLX LLC, The Nasdaq Stock Market, LLC, National Stock Exchange, LLC, New York Stock Exchange, LLC, NYSE ARCA, Inc., and NYSE Mkt., LLC, Defendants. Harold R. Lanier, on behalf of himself individually and on behalf of others similarly situated, Plaintiff, v. BATS EXCHANGE, INC., BATS Y–Exchange, Inc., Chicago Board Options Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., International Securities Exchange, LLC, Nasdaq OMX BX, Inc., Nasdaq OMX PHLX LLC, the Nasdaq Stock Market, LLC, Nasdaq OMX Group, Inc., National Stock Exchange, Inc., New York Stock Exchange, LLC, NYSE ARCA, Inc., and NYSE Mkt., LLC, Defendants. Harold R. Lanier, on behalf of himself individually and on behalf of others similarly situated, Plaintiff, v. BATS Exchange, Inc., Box Options Exchange, LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Inc., International Securities Exchange, LLC, Ise Gemini, LLC, Miami International Securities Exchange, LLC, Nasdaq OMX BX, Inc., Nasdaq OMX PHLX LLC, the Nasdaq Stock Market, LLC, NYSE ARCA, Inc., and NYSE Mkt., LLC, Defendants.
• Court: U.S. District Court — Southern District of New York

105 F.Supp.3d 353

Harold R. LANIER, on behalf of himself individually and on behalf of others similarly situated, Plaintiff,

v.BATS EXCHANGE, INC., BATS Y–Exchange, Inc., Chicago Board Options Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., International Securities Exchange, LLC, Nasdaq OMX BX, Inc., Nasdaq OMX PHLX LLC, The Nasdaq Stock Market, LLC, National Stock Exchange, LLC, New York Stock Exchange, LLC, NYSE ARCA, Inc., and NYSE Mkt., LLC, Defendants.

Harold R. Lanier, on behalf of himself individually and on behalf of others similarly situated, Plaintiff,

v.BATS EXCHANGE, INC., BATS Y–Exchange, Inc., Chicago Board Options Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., International Securities Exchange, LLC, Nasdaq OMX BX, Inc., Nasdaq OMX PHLX LLC, the Nasdaq Stock Market, LLC, Nasdaq OMX Group, Inc., National Stock Exchange, Inc., New York Stock Exchange, LLC, NYSE ARCA, Inc., and NYSE Mkt., LLC, Defendants.

Harold R. Lanier, on behalf of himself individually and on behalf of others similarly situated, Plaintiff,

v.BATS Exchange, Inc., Box Options Exchange, LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Inc., International Securities Exchange, LLC, Ise Gemini, LLC, Miami International Securities Exchange, LLC, Nasdaq OMX BX, Inc., Nasdaq OMX PHLX LLC, the Nasdaq Stock Market, LLC, NYSE ARCA, Inc., and NYSE Mkt., LLC, Defendants.

Nos. 14–cv–3745 KBF

14–cv–3865 KBF

14–cv–3866 KBF.

United States District Court, S.D. New York.

Signed April 28, 2015.

David Steven Preminger, Keller Rohrback L.L.P., New York, NY, James Christopher Bradley, Kimberly Keevers Palmer, Nina Fields Britt, Richardson, Patrick, Westbrook & Brickman, LLC, Mount Pleasant, SC, Laura R. Gerber, Michael D. Woerner, Tana Lin, Keller Rohrback, L.L.P., Seattle, WA, Michael J. Brickman, Richardson, Patrick, Westbrook & Brickman, LLC, Charleston, SC, Michael T. Lewis, Sr., Lewis & Lewis Attorneys, Stuart Halkett McCluer, McCulley McCluer PLLC, Oxford, MS, R. Bryant McCulley, McCulley McCluer PLLC, Sullivans Island, SC, for Plaintiffs.

James Alwin Murphy, Theodore R. Snyder, Murphy & McGonigle, P.C., Seth L. Levine, Christos Papapetrou, Levine Lee LLP, Charles E. Dorkey, III, McKenna Long & Aldridge, New York, NY, Joseph C. Lombard, Murphy & McGonigle PC, Washington, DC, Elyse Kennedy Yang, Paul E. Greenwalt, Schiff Hardin LLP, Chicago, IL, Douglas Randall Cox, Noah Patrick Sullivan, Gibson, Dunn & Crutcher, LLP, George Kostolampros, Treazure R. Johnson, McKenna Long & Aldridge LLP, George Anthony Borden, Steven M. Farina, Jessica L. Pahl, Thomas G. Hentoff, Williams & Connolly LLP. Washington, DC, for Defendants.

OPINION & ORDER

KATHERINE B. FORREST, District Judge:

In 2014, author Michael Lewis published his bestselling book Flash Boys,which argued that so-called “high-frequency traders” have been able to gain an unfair advantage in the U.S. equities market because equities exchanges have permitted them to pay premium prices in order to obtain the ability to obtain and trade on market data faster than other investors. See generallyMichael Lewis, Flash Boys(2014). Since that time, several lawsuits against these exchanges have been filed in this District and in the Northern District of Illinois, alleging that by offering such advantages to high-frequency traders, the exchanges have violated various federal statutes and regulations, particularly the Commodities Exchange Act and the Securities Exchange Act of 1934 (the “Exchange Act”). See, e.g., Flynn v. Bank of Am. Corp.,No. 14–cv–4321 (S.D.N.Y. June 13, 2014); Harel Ins. Co. v. BATS Global Mkts. Inc.,No. 14–cv–3608 (S.D.N.Y. May 20, 2014); Am. Eur. Ins. Co. v. BATS Global Mkts. Inc.,No. 14–cv–3133 (S.D.N.Y. May 2, 2014); City of Providence, R.I. v. BATS Global Mkts., Inc.,No. 14–cv–2811 (S.D.N.Y. Apr. 18, 2014); Braman v. CME Grp. Inc.,No. 14–cv–2646 (N.D.Ill. Apr. 11, 2014).

The three materially identical lawsuits currently before this Court (nos. 14–cv–3745, 14–cv–3865, and 14–cv–3866), which have been brought by plaintiff Harold Lanier on behalf of himself and others similarly situated against a number of defendant exchanges,¹are similar to these other actions, but they differ in two key respects. First, Lanier makes the novel factual allegation that certain preferred data customers have been able to receive unconsolidated market data before that data arrives at the processor responsible for consolidating it and distributing it to other customers. Second, Lanier does not assert any claims under federal law. Rather, he argues that the exchange defendants are liable for breach of contract under state law. This claim is based on Lanier's assertion that when defendants make market data available to preferred data customers more quickly than other customers, they violate Regulation NMS, which is incorporated by reference into contracts between plaintiff Lanier and defendants.

Defendants have filed consolidated motions to dismiss all claims. Because Lanier's claims are preempted by a comprehensive federal regulatory scheme, and because his factual allegations are nevertheless insufficient to state a claim under Rule 12(b)(6), these motions are GRANTED. Under the regulatory framework established by Congress, Lanier's claims must be adjudicated in the first instance by the Securities Exchange Commission (the “SEC”), and not this Court.

I. FACTUAL ALLEGATIONS

Plaintiff Lanier has entered into contracts to receive electronic market data services from defendants, all of which operate securities exchanges (the “Exchange Defendants”). (3745 Am. Compl. ¶ 1 & n. 1; 3865 Am. Compl. ¶ 1 & n. 1; 3866 Am. Compl. ¶ 1 & n. 1.) The Exchange Defendants receive hundreds of millions of dollars in subscription fees in exchange for providing these data services. (See3745 Am. Comp. ¶ 7; 3865 Am. Compl. ¶ 7; 3866 Am. Compl. ¶ 7.) All of the electronic market data services contracts that Lanier has entered into with the Exchange Defendants are similar in all respects material to all of Lanier's claims. (3745 Am. Compl. ¶ 6; 3865 Am. Compl. ¶ 6; 3866 Am. Compl. ¶ 6.) Each contract obligates an Exchange Defendant “to provide valid market data” to Lanier. (3745 Am. Compl. ¶ 6; 3865 Am. Compl. ¶ 6; 3866 Am. Compl. ¶ 6.)

Lanier alleges that in an effort to increase profits through subscription fees and/or the volume of market activity on their exchanges, the Exchange Defendants enabled certain “Preferred Data Customers” to have advance access to the market data that the Exchange Defendants were contractually obligated to provide to him and other subscribers. (3745 Am. Compl. ¶ 2; 3865 Am. Compl. ¶ 2; 3866 Am. Compl. ¶ 2.) This breached their promise “to provide Subscribers with the market data in a non-discriminatory manner.” (3745 Am. Compl. ¶ 2; 3865 Am. Compl. ¶ 2; 3866 Am. Compl. ¶ 2.) Lanier asserts that the “gravamen” of his claims in each action is that “by providing earlier access to the data to Preferred Data Customers through the use of the separate data distribution channels, the Exchange Defendants breached the Contracts, including the duty of good faith and fair dealing, because they deprived Subscribers of the value for which they contracted, thereby causing them harm.” (3745 Am. Compl. ¶ 8; 3865 Am. Compl. ¶ 8; 3866 Am. Compl. ¶ 8.)

Lanier asserts that he is alleging state law contract claims based on the sale of stale data to him and other similarly situated subscribers. (3745 Am. Compl. ¶ 5; 3865 Am. Compl. ¶ 5; 3866 Am. Compl. ¶ 5.) Lanier asserts that he is not complaining about the existence of separate distribution channels per se, but rather that he is seeking redress for a violation of a contractual commitment prohibiting defendants from providing earlier access to market data to Preferred Data Customers. (3745 Am. Compl. ¶ 5; 3865 Am. Compl. ¶ 5; 3866 Am. Compl. ¶ 5.)

A. The Data

The market data disseminated by the Exchange Defendants to subscribers is required to be the best bid and offer and trade data for the securities traded on each defendant's exchange. (3745 Am. Compl. ¶ 9; 3865 Am. Compl. ¶ 9; 3866 Am. Compl. ¶ 9.) The market data is distributed according to market data reporting plans pursuant to which a defendant submits market data to a processor. (3745 Am. Compl. ¶ 10; 3865 Am. Compl. ¶ 10; 3866 Am. Compl. ¶ 10.) The Processor consolidates the data from all the exchanges, determines the overall “consolidated” best bid and offer, and then distributes that data (as well as trade data) via the Securities Information Processor (“SIP”) or “Subscriber Feed” to customers such as Lanier. (3745 Am. Compl. ¶ 10 & n. 6; 3865 Am. Compl. ¶ 10 & n. 6; 3866 Am. Compl. ¶ 10 & n. 6.) “The consolidated or aggregated market data is intended to be a single source of information across all markets, rather than requiring the public to obtain data from many different exchanges and different markets.” (3745 Am. Compl. ¶ 10; 3865 Am. Compl. ¶ 10; 3866 Am. Compl. ¶ 10.) Lanier alleges that the “Subscriber Contracts obligated defendants to provide to Subscribers valid market data on a non-discriminatory basis” but that what they in fact received had already been sent to the Preferred Data Customers and was therefore stale. (3745 Am. Compl. ¶ 11; 3865 Am. Compl. ¶ 11; 3866 Am. Compl. ¶ 11.)

According to Lanier, most if not all of defendants charge a substantial premium to Preferred Data Customers in return for receiving the data before it is received by Subscribers. (3745 Am. Compl. ¶ 13; 3865 Am. Compl. ¶ 13; 3866 Am. Compl. ¶ 13.) This is done by “mak[ing] the data available” to the processor “such that the data arrives at the Processor well over one thousand microseconds later than the same data distributed over faster channels reaches Preferred Data Customers.” (3745 Am. Compl. ¶ 14; 3865 Am. Compl. ¶ 14; 3866 Am. Compl. ¶ 14.) The Preferred Data Customers are then able to cancel orders and execute trades before Subscribers...