Opinion ID: 8410533
Heading Depth: 3
Heading Rank: 3

Heading: Complex Order Types

Text: The third product at issue in this -case is complex order types: pre-programmed, electronic ■ commands that traders use to instruct the exchanges on how to handle their bids and offers under certain conditions. These commands govern the manner in which the exchanges process orders in their trading systems, route orders to other exchanges, and execute trades. Concept Release on Equity Market Structure, 75 Fed. Reg. 3,594, 3,598 (Jan. 21, 2010). As with co-location services and proprietary data feeds, the SEC regulates complex order types, but it also has instituted enforcement proceedings against the exchanges for providing certain complex orders. The SEC, for example, brought an action against an exchange for providing order types that functioned differently from the descriptions that the exchange filed with the SEC and for selectively disclosing an order type’s functionality only to certain HFT firms. EDGA Exch., Inc., Exchange Act Release No. 34-74032, 110 SEC Docket 3510, 2015 WL 137640 (Jan. 12,2015) (settled action). Plaintiffs allege that the defendant exchanges developed several fraudulent and deceptive complex order types to benefit HFT firms at the expense of the plaintiffs. For instance, according to the plaintiffs, the' exchanges have created “hide and light” orders, that allow traders to place orders that remain hidden from the ordinary bid-and-offer listings on an individual exchange until a stock reaches a particular price, at which point the hidden orders emerge and jump the queue ahead of other investors’ orders. Plaintiffs also argue, and the exchanges dispute, that certain exchanges have not adequately disclosed the full functionality of these order types to all market participants. According to plaintiffs, this selective disclosure has caused harm to ordinary investors including, among other things, increased opportunity costs from unexecuted fill orders, adverse selection and price movement bias on executed fill orders, and increased execution costs. IY. Procedural History On April 18, 2014, the City of Providence filed a putative class action against the exchanges under §§ 6(b) and 10(b) of the Exchange Act and SEC Rule 10b-5. 3 The district court consolidated the action with several related cases and appointed several institutional investors as lead plaintiffs. On January. 12,2015, the Judicial Panel on Multidistrict Litigation combined this consolidated action with other similar cases. The exchanges then moved to dismiss the plaintiffs’ complaint, arguing that (1) the district court lacked jurisdiction; (2) the exchanges were absolutely immune from suit; and (3) the plaintiffs had failed to state a claim under the Exchange Act. On August 26, 2015, the district court determined that it had subject matter jurisdiction over this case. It held that the exchanges were absolutely immune from plaintiffs’ allegations concerning the proprietary data feeds and complex order types, but not co-location services. The district court further concluded that, even if the exchanges were not absolutely immune, the plaintiffs had failed to state a claim for a violation of § 10(b) and Rule 10b-5 based on a manipulative scheme. The district court therefore granted the exchanges’ motion and dismissed the complaint. Plaintiffs timely filed this appeal.