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Exchanges win dismissal of U.S. high-frequency trading lawsuits

Taxi cabs drive past the Nasdaq MarketSite in New York's Times Square, August 23, 2013. REUTERS/Andrew Kelly

By Jonathan Stempel

NEW YORK (Reuters) - A federal judge has dismissed lawsuits accusing several major U.S. exchanges of cheating ordinary investors by selling early access to market data to high-frequency traders, giving them a split-second advantage in making trades.

In a decision released Tuesday night, U.S. District Judge Katherine Forrest in Manhattan said the claims raised against Nasdaq , Intercontinental Exchange Inc's New York Stock Exchange, BATS Exchange and other exchanges must be reviewed first by the U.S. Securities and Exchange Commission, not the courts.

Harold Lanier, the named plaintiff in all three proposed class actions, said the exchanges violated his contractual right to timely market data by letting high-frequency traders pay "substantial premiums" to receive market data more than 1,000 microseconds sooner, a "virtual eon" in the marketplace.

The Fairhope, Alabama investor said the exchanges did this by letting preferred traders receive unconsolidated data before a processor consolidated that data for distribution to others, causing ordinary investors like himself to receive stale data.

Forrest, however, said Congress created a "comprehensive federal regulatory scheme" empowering the SEC to decide whether exchanges are disseminating data to investors fairly.

She also said neither the SEC nor Lanier's contracts required exchanges to ensure that ordinary customers receive consolidated market data no later than other customers receive unconsolidated data through proprietary feeds.

David Preminger, a lawyer for Lanier, did not immediately respond on Wednesday for comment.

Lawyers for some of the defendants declined to comment or did not immediately respond to requests for comment.

High-frequency traders were the subject of Michael Lewis' 2014 best-seller "Flash Boys," which argued that the traders have an unfair advantage because exchanges let them obtain and trade on market-moving data faster than ordinary investors.

The Lanier lawsuit is separate from litigation in which pension funds, the city of Providence, Rhode Island and other investors are seeking to recoup billions of dollars they say they lost at the expense of high-frequency traders who had special access.

The cases are Lanier v. BATS Exchange Inc et al, U.S. District Court, Southern District of New York, Nos. 14-03745, 14-03865, 14-03866.

(Reporting by Jonathan Stempel; Editing by Grant McCool)