In City of Providence v. BATS Global Markets, Inc., the US Court of Appeals for the Second Circuit held that national securities exchanges registered with the Securities and Exchange Commission (SEC) as self-regulatory organizations (SROs) did not qualify for quasi-governmental immunity where the plaintiffs alleged that the exchanges manipulated markets to benefit high-frequency traders. The court ruled that those allegations involved the SROs' market operations as regulated entities, rather than the SROs' regulatory authority over their broker-members ( (2d. Cir. Dec. 19, 2017)).

On April 18, 2014, the City of Providence and other investors filed a putative class action in the US District Court for the Southern District of New York, alleging that seven national securities exchanges manipulated stock market activity in violation of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and SEC Rule 10b-5. As SROs, the exchanges function as both regulators and regulated entities. The SEC grants them delegated authority to oversee their member broker-dealers but, as regulated entities, they must comply with the securities laws and the exchanges' own rules.

The district court consolidated the action with several related cases and appointed lead plaintiffs. The plaintiffs alleged that the SROs misled them about products and services the SROs sold to high-frequency trading (HFT) firms, to give HFT firms advantages by offering three services:

The SROs moved to dismiss the consolidated complaint, arguing, among other things, that the exchanges were quasi-governmental entities absolutely immune from suit. The district court generally agreed, ruling that the SROs were absolutely immune from the plaintiffs' allegations on proprietary data feeds and complex order types, but not immune from suit on co-location services. The district court further ruled that, even if the SROs were not immune, the plaintiffs failed to state a claim for violation of § 10(b) of the Exchange Act and SEC Rule 10b-5.

The Second Circuit vacated the district court's judgment. After initially determining that it had subject matter jurisdiction, the court next ruled that the exchanges did not have absolute immunity. The Second Circuit clarified that SROs qualify for immunity as quasi-governmental actors only when they "step into the shoes of the SEC." Therefore, the SROs may benefit from absolute immunity when they carry out their regulatory functions, not when they carry out functions as regulated entities.

The Second Circuit held that, in this case, the plaintiffs' claims did not involve the defendant SROs' regulatory functions. The court explained that when an exchange engages in conduct to operate its own market, it acts as a regulated entity, rather than as a regulator. The plaintiffs alleged that the exchanges disseminated market data in a way that unlawfully benefitted HFT firms. Therefore, the allegations involved the SROs' operation of their markets, rather than the SROs' regulatory functions over their members, and no immunity applied.

The Second Circuit additionally held that the plaintiffs sufficiently pled a claim that manipulative acts by the defendant exchanges violated § 10(b) and Rule 10b-5. The court therefore vacated the district court's entry of judgment and remanded for further proceedings.