Back in February, we posted an update on the high frequency trading litigation, covering the motion for class certification recently filed in the multi-district litigation. Today, we’re here with a quick update on a recent decision, this time on Defendant’s Rule 56 motion for summary judgment on the ground that Plaintiffs lack Article III standing. Defendants simultaneously moved to exclude the expert testimony on which Plaintiffs relied to prove standing. The court granted both motions, stating that “Plaintiffs have not put forward evidence from which a jury could reasonably conclude they have suffered an injury in fact that is fairly traceable to the Exchanges’ sale of these products and services[.]”
The litigation generally concerns certain products and services adopted and marketed by several stock exchanges (the “Exchange Defendants”)—namely, co-location services, proprietary data feeds, and complex order types—which increased the speed at which high-frequency traders (“HFTs”) could execute their trades. Because these products and services were, according to plaintiffs, neither fully disclosed nor sold at prices affordable by the ordinary investor, the result was to give the HFT trading firms advantages over non-HTF firms and the general investing public. For more details on the underlying allegations, take a look back at our first two posts on this topic, here and here.
In support of their standing arguments, Plaintiffs relied on three expert reports authored by David Lauer, a former HFT trader (together, the “Lauer Reports”). The first report computed estimated damages for non-HFT firms, based on a model that estimated “on average…nearly $480,000 in damages per day” incurred by non-HFTs. These damages, Lauer concluded were the result of “fundamental differences between HFT and non-HFT firms, specifically the use by HFT firms of every high-performance option offered by the exchanges, including fast, proprietary market data feeds, complex order types, low latency network cross-connects, high-speed binary order entry protocols and co-location.” The second report, a supplemental report filed in opposition to the Exchanges’ motion for summary judgment, tried to address the more specific question of “whether any of Plaintiffs’ orders were subjected to adverse selection,” and to calculate damages for Plaintiffs on those particular orders. Finally, the third report was an amended supplemental report, nearly identical to the second report but adding additional examples of trades in which one additional plaintiff was allegedly harmed.
The Exchange Defendant’s motion for summary judgment on standing grounds was largely based on their contention that the Lauer Reports were inadmissible. Accordingly, the Court inverted the usual order of business, and considered the evidentiary question prior to its discussion on standing. First reviewing the Daubert and FRE 702 standards, the Court noted that it must determine first that there is a “fit” between the “proffered opinion and the facts of the case,” to ensure that the expert “whether basing testimony upon professional studies or personal experience, employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field.” Expert testimony, the Court went on, “should only be excluded if it is speculative or conjectural[,]” and that exclusion should be “the exception rather than the rule.”
Even with this comparatively low bar, the Court concluded that Lauer’s opinions were inadmissible:
Applying the foregoing standards, the Court concludes that Lauer’s opinions based on his markout analyses are inadmissible for two interrelated reasons: They do not “fit” the facts of the case, and they are not supported by reliable methods. In particular, there is a clear disconnect between the facts of the case and Plaintiffs’ theory of Defendants’ liability, on the one hand, and Lauer’s data and the opinions they can reliably support, on the other.
In all three of Lauer’s reports, the damages theories were based the harm caused by the Exchanges’ sale of the three at-issue products and services to certain firms, and purported to show those damages through the harm allegedly caused to “non-HFT” firms as a result of their trades with “HFT” firms. The Court found this theory problematic because the record did not show any evidence that the firms classified by Lauer as “HFT” or “non-HFT” in fact used (or did not use, as the case may be) the products and services at issue. The Court pointed to Lauer’s own testimony on the issue, noting that when specifically asked if he verified these key assumptions, Lauer replied, “I did not.” The Court was unmoved by Lauer’s testimony concerning his “knowledge of firms that are generally known to be HFT trading firms,” particularly in the face of the Exchange’s expert testimony that several entities were mis-categorized. As the Court concluded:
The markout analyses on which Lauer relies cannot reliably demonstrate harm caused by (or fairly traceable to) the at-issue products because his methodology does not distinguish firms that used the at-issue products from those that did not. As in Amorgianos, “there is simply too great an analytical gap between the data and the opinion proffered.” 303 F.3d at 270[.]
The Court also noted that Lauer’s report failed to “disentangle” advantages gained by the at-issue products from possible advantages arising from “software and hardware optimization internal to the HFT firm.” This showed a “failure to control for other sources of HFT speed advantages beyond the Exchanges’ at-issue products and services,” which the Court considered to have “undermine[d] the reliability of his conclusions.”
After analyzing, and excluding, the expert evidence, the Court turned to the Article III standing questions. Based on the admissible evidence only the court found that “Plaintiffs have failed to put forward the ‘specific facts’ necessary to demonstrate injury in fact fairly traceable to the Exchanges’ allegedly unlawful conduct.” Interestingly, the Court reviewed, as a point of comparison, its ruling on standing at the pleading stage. There, the Court had held that Plaintiffs had satisfied the injury-in-fact requirement, despite not alleging transactions “in any particular security at any particular price, or how that prices was supposedly affected by the alleged manipulation,” because the only requirement at that stage was for “general factual allegations.” However, that decision itself observed that Plaintiffs “may face an uphill battle in proving any harm at all,” and may not be able to show injury under the more demanding summary judgment standards. That proved to be presentient.
In addition to Plaintiff’s standing theory based on the Lauer report, they also alleged standing based on a general theory of “marketwide” harm, arguing that this was sufficient to create a genuine issue of fact as to injury, even without the more specific trade-based evidence of the Lauer report. This argument was quickly dismissed by the Court, who pointed to Second Circuit precedent (John v. Whole Foods Mkt. Grp., Inc., 858 F.3d 732 (2d Cir. 2017) and John v. Whole Foods Mkt. Grp., Inc., 823 F. App’x 46 (2d Cir. 2020)) finding that general factual allegations of marketwide harm were insufficient unless paired with “evidence that the plaintiff had purchased those products.”
Finally, the Court held that, even if the Lauer reports were admissible, the case “would still founder on the traceability requirement,” because of Lauer’s failure to adequately distinguish between firms using the at-issue products and those that did not. After the Court found it lacked subject matter jurisdiction, the other open motions, including Plaintiff’s motion for class certification, were necessarily dismissed as moot.
So, is this the end of the road for Plaintiffs? It would appear so, but there may well be a trip back to the Second Circuit in the works. No notice of appeal has been filed yet, but we will keep you posted on any future filings.
This post was written by Alexandra M.C. Douglas.