Inside the traders’ black box

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Ethan Wu (0:36)

Pushkin.

If you have bought or sold stocks in the US you most likely have interacted with a high-frequency trader, even if indirectly. These big trading houses make US stock markets work, but they're a little bit of a black box. A recent lawsuit suggests that may be changing. This is Unhedged, the Markets and Finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu here in the New York studio, joined today by legal correspondent Joe Miller to help us break open the black box. Joe, using like a crowbar or like, how are you cracking this one open?

Joe Miller (1:11)

No, I'm using my ability to read 85 pages of dense legal filings without giving up or quitting.

Ethan Wu (1:17)

You're really selling your job to the audience.

Joe Miller (1:19)

I know, right?

Ethan Wu (1:20)

It sounds truly thrilling.

Joe Miller (1:21)

I love this stuff though.

Ethan Wu (1:22)

So Joe, you've just written a really interesting, excellent column about a small little biotech company, the small little biotech company that could, and by could I mean sue the big, high frequency traders, the titans of Wall Street, about alleged spoofing. We need to walk through this because it's technical and it's granular, but I think it really gets to the heart of a big conflict that's been going on for, I mean, at this point, a decade on Wall Street.

Joe Miller (1:46)

Yeah, Ethan, as you know, I am a card carrying nerd, but even for me, this is quite nerdy, but I think very interesting, so stick with me. In late 2022, a small Maryland biotech, which is developing a vaccine for brain cancer, one of the most pernicious forms of cancer, filed this bombshell lawsuit, and this lawsuit named a bunch of companies known as market makers, including Virtu, and you may have heard of Ken Griffin's Citadel.

Ethan Wu (2:18)

Ken Griffin, of dumb money fame. Citadel Securities.

Joe Miller (2:20)

Citadel Securities, yes, correct. Yeah, thank you for that correction. And essentially, the allegation which we can get into in detail was that these enormous companies, you know, multi-billion dollar companies who control more and more of trading on New York stock exchanges, that they were doing something called spoofing. And essentially, what they were doing is they were targeting a stock, in this case, a small company, you know, trying to do good in the world. And they were putting in fake sell orders on those stocks, sending a signal to the market because there were all of these sell orders going in, that they were down on this stock, waiting for the stock price to plummet and then buying back that stock at a much cheaper price.

This was a, you know, it's fair to say, this is an explosive allegation and not very many people thought that this would go very, very far.

Ethan Wu (3:15)

But the magistrate in the case seems open to it.

Joe Miller (3:17)

Exactly, so I was following this, you know, without much hope of it ever going anywhere. And then I'm standing in the line, actually, for one of the Trump hearings the other day, and I'm just checking, you know, the latest orders that have been filed in various cases, and I see that this case has been dismissed. And usually that would be the end of that. But there was a long, what's called R&R, which is a report and recommendation from a magistrate judge on why it should be dismissed.

And as I'm reading this, it's like he's validating every single one of the allegations. When I say validating, he's not going to the truth of those allegations, but saying, hey, on the face of it, these allegations are at least plausible enough to proceed.

And the only reason he dismissed the case was he said that he didn't think that the plaintiffs had done enough to tie the stock losses on various days to specific trading. It's a technicality which he urged them to fix and to refile. But all of a sudden, this, for lack of a better word, conspiracy theory, which most people had been painting this lawsuit as, and it lit up the Reddit threads, the sort of Reddit threads that were behind the meme stock trading. Here you have a very sober magistrate in probably the most important commercial court in the world saying, look, this stuff is plausible enough to be able to be taken forward. And that's what really caught my attention.