Myun-Uk Choi v. Tower Research Capital L.L.C.

890 F.3d 60 (2018)

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Myun-Uk Choi v. Tower Research Capital L.L.C.

United States Court of Appeals for the Second Circuit
890 F.3d 60 (2018)

  • Written by Brett Stavin, JD

Facts

Tower Research Capital L.L.C. (Tower) (defendant) was a high-frequency-trading firm based in New York. In 2012 Tower utilized sophisticated technologies and algorithms to trade futures contracts on the Korea Exchange (KRX). Tower did not trade futures during regular trading hours. Tower traded during a night market made possible by an agreement between KRX and United States-based CME Globex. Trades made during the night market began with a trader placing a limit order for the purchase or sale of a future at a specific price. That order would be matched by a corresponding buy or sell order. Because the KRX was closed during night hours, the trades were not formally cleared and settled until KRX opened on the next business day. A group of five Korean investors (the Korean investors) (plaintiffs) also traded on the KRX night market. Both the Korean investors and Tower traded in futures tied to the KOSPI 200, a weighted index of 200 Korean stocks. The Korean investors filed a lawsuit against Tower in federal district court under the Commodity Exchange Act (CEA), claiming that Tower engaged in spoofing transactions in which Tower would place fictitious trades to drive the market price of KOSPI 200 futures up or down. Then Tower would either buy the KOSPI 200 futures at the lower price or sell the KOSPI 200 futures at the higher price, profiting from the manipulation. The Korean investors claimed that Tower used this strategy extensively throughout 2012, earning over $14 million in profits. During the same period, the Korean investors made more than 1,000 KRX night market trades. Although the matching of parties on CME Globex was anonymous, the Korean investors claimed that it was a near certainty that at least one of them was at some point a counterparty to a trade made by Tower. The Korean investors also claimed that even if they were never counterparties to Tower trades, they were still injured by Tower’s market manipulation. Tower moved to dismiss on the ground that the CEA did not apply to its conduct, arguing that its transactions were not domestic because Tower did not incur irrevocable liability within the United States. The district court agreed, granting the motion to dismiss. The Korean investors appealed.

Rule of Law

Issue

Holding and Reasoning (Walker, J.)

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