Since U.S. securities exchanges started to demutualize last decade, the issue of for-profit self-regulatory organizations having immunity has been a sore point for many traders and institutional investors.

The US Court of Appeals for the Second Circuit recently has cited the extents to which securities exchanges are immune investor and trader lawsuits due to their regulatory nature.

On December 19, the appeals court overturned the US District Court’s dismissal of the 2014 class action lawsuit brought by institutional investors against the exchanges for alleged manipulative and deceptive conduct that created a two-tier market, which favors high-frequency traders.

In Judge John M. Walker Jr.’s opinion, he noted that SROs and their officers are entitled to absolute immunity when they are acting under the aegis’ of their regulatory duties.

Walker then cited six non-exclusive instances regarding when SROs are entitled to such absolute immunity.

• In the context of disciplinary proceedings against exchange members
• The enforcement of security‐related rules and regulations and general regulatory oversight over exchange members
• The interpretation of the securities laws and regulations as applied to the exchange or its members
• The referral of exchange members to the SEC and other government agencies for civil enforcement or criminal prosecution under the securities laws
• The public announcement of an SRO’s cancellation of trades
• An amendment of an SRO’s bylaws where the amendments are “inextricabl[y]” intertwined with the SRO’s role as a regulator

However, the complaints brought by the plaintiffs regarding the use of proprietary data feeds, complex order types and co-location services that favor HFTs does not fall under SROs’ regulatory duties, according to Walker.

“We agree with the exchanges and the district court that disseminating market data is a critical function for which exchanges have various responsibilities under Regulation NMS, and more generally, that the exchanges have numerous obligations to ensure fair and orderly securities markets,” he wrote. “But the provision of colocation services and proprietary data feeds does not relate to the exchange’s regulatory function and does not implicate the SROs’ need for immunity. Similarly, as the exchanges concede, complex order types are ‘pre-programmed commands traders use to tell the Exchanges how to handle their bids and offers’– not regulatory commands by the exchange compelling traders to behave in certain ways.”

As a result, the appeals court concluded that when the exchanges provided these challenged products and services that they had not “effectively stand in the shoes of the SEC” and were not entitled to the same immunity that would otherwise be afforded to the SEC.