Legal Liability for Fraud in the Evolving Architecture of Securities Markets: From Marketplaces to Traders

Abstract

This chapter analyses the reach of legal liability for securities fraud in the United States in relation to certain types of abuses often associated with high-frequency trading strategies. The nature of algorithmic and high-frequency trading presents new challenges for establishing legal liability for fraud in securities markets. It specifically examines the reach of legal liability in relation to two, sometimes overlapping, entities: marketplaces and proprietary traders. Through an examination of various informational asymmetries in securities markets, including the order type controversy, this chapter finds that establishing liability for securities fraud is significantly murkier for proprietary traders than for marketplaces. Subsequently, this study addresses potential approaches to the reach of liability to traders and discusses mechanics and proper characterization of the underlying harm.

Keywords: securities fraud, liability, high-frequency trading, informational asymmetry, the order type controversy

JEL Classification: G18, K22