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Stephen Ratner

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Stephen L. Ratner has represented banks and other financial services institutions in complex litigations, investigations and enforcement proceedings, arbitrations and mediations, compliance issues, and regulatory controversies involving securities, commodities, and derivative products.

Steve has defended clients in class actions and other actions including high frequency and algorithmic trading, short selling practices, IPO allocations, and data security and privacy issues. He has also handled internal investigations and investigations and enforcement proceedings by the SEC, CFTC, Department of Justice, FINRA and other regulators regarding issues such as high frequency and algorithmic trading, market access, securities lending, trade reporting, short selling, electronic communications, and supervision. Steve also represented banks and other financial institutions in fraudulent transfer litigation and other litigation based upon failed LBOs and alleged Ponzi schemes.

Steve served as a member of Proskauer’s Executive Committee, an adjunct professor of law at Benjamin N. Cardozo School of Law, and a mediator appointed by the U.S. District Court for the Southern District of New York. Steve co-authored the “Broker-Dealer Litigation and Arbitration” chapter in the Commercial Litigation in New York State Courts treatise, and was a frequent speaker on matters related to the financial services industry.

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Ruling on Barclays’ motion to dismiss the action brought by the New York Attorney General regarding Barclays’ alternative trading system (“ATS”), Justice Shirley Kornreich suggested that the AG may face substantial hurdles in proving its case, although the Court narrowly upheld the Martin Act claim as a matter of law.

The AG based its claim on statements allegedly made to ATS participants regarding restrictions on use of the ATS for certain types of high frequency trading activity, which the complaint alleged to be false.  The case raised the novel legal issue of whether New York’s Martin Act applies to these statements, which did not relate to the purchase or sale of any particular security but addressed the nature of the trading venue that might be selected for securities transactions.

On January 12, 2015, the Securities and Exchange Commission announced that it had obtained a $14 million settlement against two exchanges formerly owned by Direct Edge Holdings, EDGA and EDGX (the “Respondent Exchanges”) for their failure to file Exchange Rules that accurately described the order types they offered, and for providing preferential disclosure to certain high frequency traders.  This recovery constitutes the largest penalty ever levied by the SEC against a national securities exchange and appears to be the first action focusing primarily on exchange order type issues.

According to the SEC’s Order, the official Rules filed by both Exchanges only described a single price sliding order type, while each Exchange actually offered three variations to their members: Hide Not Slide, Price Adjust, and Single Re-Price.  The SEC claims that the Rules failed to describe each order’s functionality and their priorities relative to each other and other order types.  Moreover, although this information was not available to all members, the Exchanges provided it to a select few customers, including several high frequency trading firms.  The SEC also claims that that two of these order types were developed in response to requests from high frequency trading customers and that both Exchanges would rotate which order type was used by default without filing the necessary Rule Amendment or providing notice to anyone except these “preferred” members.

FINRA’s recently-released Regulatory and Examinations Priorities Letter for 2015 reflects substantial regulatory interest in high-frequency trading and other issues arising from trading technology.  Regulatory concern over these issues has been previously reported on this blog here and here.

The 2015 Letter states that FINRA has adapted its surveillance program to identify potentially violative conduct such as trading by “abusive algorithms” made possible by advances in technology and changes in market structure.  Abusive algorithms, according to FINRA, include trading algorithms that seek to manipulate the market through layering, spoofing, wash sales, marking the close, or other manipulative techniques.

Bringing quantitative analyses to the debate over high-frequency trading, two working papers recently made available by the SEC’s Division of Economic and Risk Analysis present economic models suggesting that there are market benefits from certain forms of high-frequency and low-latency trading.   In light of the on-going interest in high-frequency trading among various regulators, the recognition of market benefits is an important development.

The first paper, Automated Liquidity Provision, by Austin Gerig, an SEC staff economist and David Michayluk of the University of Technology, Sidney, addresses automated systems designed to provide market liquidity by trading at high frequency across different exchanges and securities.  These automated liquidity providers have largely replaced traditional market makers, and the authors studied the effects of this automation on pricing and transaction costs.

Regulators across markets continue to show interest in high frequency trading and algorithmic trading generally. Recent developments in this area include:

  • On October, 16, 2014, the SEC imposed a $1 million sanction on a high frequency trading firm, Athena Capital Research, which allegedly placed large numbers of rapid-fire orders in the final two seconds of trading to manipulate the closing prices of thousands of NASDAQ-listed stocks. According to the settlement documents, the trading algorithm, code-named “Gravy,” purportedly allowed Athena to overwhelm the market’s available liquidity at the close, and artificially move the market in Athena’s favor.