Overview
In an opinion Tuesday, Judge Forrest dismissed various class action suits accusing stock exchanges of improperly allowing high-frequency traders to pay to obtain and trade on market data faster than other investors. The plaintiffs subscribed to market data via subscriber contracts that, in turn, incorporated the terms of standardized market data dissemination “plans.” Those plans, which the SEC approved, stated the data would be provided on “fair and reasonable terms” that are “not discriminatory” (or used similar language). Judge Forrest ruled that the claims were preempted by the detailed federal statutory and regulatory regime governing stock exchanges:
The key question the Court must answer in order to determine whether it has subject matter jurisdiction over this action is whether the statutory scheme described above preempts [proposed class representative ] Lanier’s state law breach of contract claims . . . According to Lanier, the fact that the Exchange Defendants transmit market data in such a manner that Preferred Data Customers receive it more quickly violates the nondiscrimination and fairness provisions of the [various plans], each of which is incorporated into the Subscriber Agreements by reference. Thus, the Subscriber Agreements’ references to the plans work feats of legal alchemy: they convert claims that are ultimately based on a violation of federal regulations into state law breach of contract claims. The problem with this argument is that the SEC has acknowledged that SROs’ use of proprietary feeds and co-location may allow certain traders to gain speed advantages—and in a number of Exchange Act Releases, it has approved their use nonetheless. See, e.g., Exchange Act Release No. 34-61358, 75 Fed. Reg. 3594 at 3610 & n.76; Exchange Act Release No. 34-59606, 74 Fed. Reg. 13,293 at 13,294; NMS Adopting Release at 37,567. Awarding Lanier relief on his breach of contract claim would require this Court to in essence determine that the Exchange Defendants are violating the plans, even though the SEC’s Exchange Act Releases indicate that the SEC is not of the view that this conduct violates the plans. While one might question the wisdom of the SEC’s stance on this issue and its fairness to ordinary investors, it is nevertheless clear that success for Lanier on his breach of contract claims would create a conflict between federal law (as interpreted by the SEC) and state law (as interpreted by this Court). Thus, were Lanier to succeed on his contract claims, there would be a conflict between state law and federal law. Lanier’s claims are therefore preempted for this reason alone.
