Case 1:14-cv-02811-JMF Document 252 Filed 11/24/14 Page 1 of 146 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK x CITY OF PROVIDENCE, RHODE ISLAND, : Civil Action No. 1:14-cv-02811-JMF PLUMBERS AND PIPEFITTERS : (Consolidated) NATIONAL PENSION FUND, : EMPLOYEES’ RETIREMENT SYSTEM OF : CLASS ACTION THE GOVERNMENT OF THE VIRGIN : ISLANDS, STATE-BOSTON RETIREMENT : SECOND CONSOLIDATED AMENDED SYSTEM, AND FÖRSTA AP-FONDEN : COMPLAINT FOR VIOLATION OF THE Individually and on Behalf of All Others : FEDERAL SECURITIES LAWS Similarly Situated, : : Plaintiffs, : : DEMAND FOR JURY TRIAL vs. : : BATS GLOBAL MARKETS, INC., : CHICAGO STOCK EXCHANGE, INC., : DIRECT EDGE ECN, LLC, THE NASDAQ : STOCK MARKET LLC, NASDAQ OMX BX, x INC., NEW YORK STOCK EXCHANGE, LLC, NYSE ARCA, INC., BARCLAYS PLC, BARCLAYS CAPITAL, INC., Defendants. Case 1:14-cv-02811-JMF Document 252 Filed 11/24/14 Page 2 of 146 TABLE OF CONTENTS Page SUMMARY OF ALLEGATIONS ..................................................................................................1 Defendants’ Scheme and Wrongful Course of Business .........................................................4 JURISDICTION AND VENUE ......................................................................................................8 PARTIES .........................................................................................................................................8 Plaintiffs ...................................................................................................................................8 The Exchange Defendants .....................................................................................................10 The Dark Pool Defendants .....................................................................................................13 CLASS ACTION ALLEGATIONS ..............................................................................................14 FACTUAL ALLEGATIONS ........................................................................................................16 The Recent Evolution of U.S.-Based Public Stock Markets..................................................16 The Proliferation of Dark Pools .............................................................................................22 The Rise of High Frequency Trading ....................................................................................24 Plaintiffs and the Class Justifiably Relied on the Fairness and Integrity of the Exchanges as Markets ............................................................................................................33 The Exchanges’ Manipulative Scheme to Defraud................................................................37 The Exchanges Mislead Investors to Induce Them to Trade Against HFT ...................37 NASDAQ ...............................................................................................................37 NYSE .....................................................................................................................39 BATS ......................................................................................................................41 Direct Edge .............................................................................................................43 CHX .......................................................................................................................45 The Exchanges Reap Massive Profits by Providing Co-Location and Low- Latency Enhanced Data Feed Services to HFT Firms ...................................................48 Co-Location ............................................................................................................49 - i - Case 1:14-cv-02811-JMF Document 252 Filed 11/24/14 Page 3 of 146 Page Direct and Enhanced Feeds ....................................................................................57 The Exchanges’ Discriminatory Fee Structure ......................................................64 The Exchanges Create Complex Order Types Designed for HFT Firms to Prey on Investor Orders .........................................................................................67 “Hide and Light” Orders ................................................................................74 Direct Edge: Hide Not Slide (+ ALO) ...................................................77 NASDAQ: Price to Comply and Post Only + “Automatic Re- Entry” .....................................................................................................80 BATS: BATS Only Post Only ...............................................................83 ARCA: Post No Preference ALO Blind (“ALO PNP B”) .....................85 CHX .......................................................................................................86 Intermarket Sweep Order Types ....................................................................88 The Day ISO Order Type ...............................................................................88 The Post-Only ISO Order Type .....................................................................91 BATS (BYX/BZX) ................................................................................96 Direct Edge (EDGX/EDGA) ..................................................................98 CHX .......................................................................................................99 NASDAQ/NASDAQ BX .....................................................................104 Flash Orders .................................................................................................105 The Exchanges’ Manipulative Scheme Damaged Plaintiffs and the Class .........................108 Electronic Front-Running ............................................................................................109 Rebate Arbitrage ..........................................................................................................111 Latency Arbitrage ........................................................................................................113 Spoofing and Layering .................................................................................................113 - ii - Case 1:14-cv-02811-JMF Document 252 Filed 11/24/14 Page 4 of 146 Page Like the Exchanges, Barclays Also Engaged in a Manipulative Scheme to Defraud Through Its Dark Pool .........................................................................................................114 Barclays’s Dark Pool (Barclays LX) ...........................................................................116 Investors Justifiably Relied on the Fairness and Integrity of Barclays’s Dark Pool as a Market ...........................................................................................................118 The Regulatory Framework Governing Dark Pools Requires Fairness ...............118 Barclays’s Public Statements Failed to Dispel – and in Fact Encouraged – Investors’ Belief in the Fairness and Integrity of Barclays’s Dark Pool ..............122 In Furtherence of Its Manipulative Scheme, Barclays Operated Its Dark Pool for Its Own Benefit and that of HFT Firms at the Expense of Investors .....................125 Barclays’s “Liquidity Profiling” Does Not Protect Investors from Predatory HFT Trading Tactics ...........................................................................125 Rather than Protecting Investors from HFT Firms in Its Dark Pool, Barclays Actively Courted HFT Firms ................................................................126 Defendants’ Scheme and Fraudulent Course of Business Have Led to Governmental Investigations and Penalties .................................................................................................128 The Exchanges’ Conduct Is Not Shielded by SRO Immunity .............................................132 COUNT I Violation of §10(b) of the Exchange Act and Rule 10b-5 Against All Defendants ...................................................................................................................................135 COUNT II Violation of §6(b) of the Exchange Act Against the Exchanges ..............................137 PRAYER FOR RELIEF ..............................................................................................................139 JURY DEMAND .........................................................................................................................140 - iii - Case 1:14-cv-02811-JMF Document 252 Filed 11/24/14 Page 5 of 146 SUMMARY OF ALLEGATIONS 1. This securities class action is brought on behalf of public investors who purchased and/or sold shares of stock in the United States between April 18, 2009 and the present (the “Class Period”) on a registered public stock exchange generated by defendants (collectively, the “Exchanges”)1 or on the alternative trading venue operated by Barclays PLC through its subsidiary Barclays Capital, Inc. (collectively, “Barclays”) identified herein (the Exchanges and Barclays, collectively, the “Defendants”), and were injured as a result of the misconduct detailed herein (the “Class”). 2. This case arises out of a scheme and wrongful course of business whereby the Exchanges and Barclays employed devices, contrivances, manipulations and artifices to defraud in a manner that was designed to and did manipulate the U.S. securities markets and the trading of equities on those markets, diverting billions of dollars annually from buyers and sellers