Sweden's AP1 steps down as lead plaintiff in dark pools lawsuit

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Swedish buffer fund AP1 has stepped down as lead plaintiff in a US class action against 40 securities brokers, high-frequency traders and exchanges, in view of a possible appeal, after a New York judge dismissed the case.

Jesse Furman, US district judge, Southern District of New York, said the lawsuit, which was consolidated from five separate cases, was primarily a matter for the financial market regulators.

Other lead plaintiffs include the City of Providence Rhode Island, and the Plumbers and Pipefitters National Pension Fund.

Defendants include Barclays Capital, the New York Stock Exchange, Nasdaq and Bats Global Markets.

The lawsuit – dubbed the “‘Flash Boys’ case”, after a best-selling book that exposed the practices of high-frequency traders (HFTs) – revolves around so-called “dark pools”, a trading venue where investors can trade stocks almost anonymously, preventing large block orders from influencing the market.

Within a dark pool, investors do not have to contemporaneously reveal their buy or sell orders to others.

The orders are therefore less likely to be picked off by HFTs looking to beat investors slower to react to new information.

However, the lawsuit alleges Barclays not only allowed HFTs to trade in its own dark pool (Barclays LX) but encouraged them with unfair perquisites over other traders.

The plaintiffs said the presence of so many predators within the pool meant institutional investors trading there suffered harm because share prices were influenced to their detriment.

Meanwhile, Barclays’s marketing literature was claiming that very little of the trading within the dark pool was “aggressive”, when in fact, by May 2014, this kind of trading made up more than 30% of the activity, according to Barclays’s own analysis quoted in the court papers.

The plaintiffs accused Barclays of deceit by concealment, unfair competition and false advertising.

Furthermore, they claimed the exchanges rigged their markets in favour of the HFT firms, by offering products which shave infinitesimal fractions of a second off the time it takes to receive and respond to information from the exchanges.

AP1 estimates it lost around SEK275m (€29.4m) over five years.

However, the judge found the exchanges to be immune from the lawsuit, saying: “The SEC [which regulates the exchanges] has ample authority and ability to … address any improprieties by the exchanges.”

He also said the plaintiffs failed to adequately plead that Barclays committed any manipulative acts, “and their claims do not allege reasonable reliance [on Barclays’s statements]”.

An appeal has been lodged, but AP1 has now said it will step down as lead plaintiff if the appeal is heard in the courts, although it will remain as a passive member of the class if a court certifies it.

Ossian Ekdahl, head of communication and ESG at AP1, said the main reason was the management time that would have to be spent on the case.

“Up until now,” he said, “we have not spent too much time on the case, but if we take it further, the amount of time needed will be significant.”

But he said no monetary considerations were involved, as AP1’s lawyers are paid on a no-win, no-fee basis.

Ekdahl added that, besides recovery of presumed losses, AP1’s involvement in the lawsuit was also motivated by a desire to uphold fair trading standards for all market participants.

“All institutions and individuals who have purchased US equities have suffered losses because of the actions taken by the firms,” he said.

“Because AP1 is a major player in many of the world’s stock exchanges, it is important for us to promote exchange trading functions in a beneficial and fair way, so that no players can enrich themselves at the expense of others.”

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