GSX Exchange Lawsuit - A Cautionary Tale

• On April 24, 2019, the U.S.
• District Court for the District of New Jersey issued a preliminary injunction barring Goldman Sachs Group Inc. (the "Exchange") from transferring GSX Holdings, Inc. ("GSX") assets until the case is resolved.
• X is the parent company of the New York Stock Exchange, LLC ("NYSE") and BX Exchange, LLC ("BX"). The case revolves around the Exchange's plans to acquire BX.
• The Exchange already owned 20% of GSX.

On April 24, 2019, the U.S. District Court for the District of New Jersey issued a preliminary injunction barring Goldman Sachs Group Inc. (the "Exchange") from transferring GSX Holdings, Inc. ("GSX") assets until the case is resolved. GSX is the parent company of the New York Stock Exchange, LLC ("NYSE") and BX Exchange, LLC ("BX").
The case revolves around the Exchange's plans to acquire BX. The Exchange already owned 20% of GSX. The Exchange planned to acquire the remaining shares of GSX so it could eventually merge BX and NYSE, forming the largest stock exchange in the world.
The lawsuit revolves around three issues:

What Does GSX Stand For?

GSX Group plc (GSX) operates the trading platform GSX. GSX Group's parent company is Intercontinental Exchange (ICE). GSX Group operates the trading platforms known as:
London Metal Exchange (LME)

Singapore Exchange (SGX)

International Petroleum Exchange (IPE)

ICE also operates the New York Stock Exchange (NYSE), NYSE Arca, and Euronext. GSX Group owns and operates the trading platforms LME, IPE, and SGX.
GSX Group, LME, IPE, and SGX are all part of ICE. GSX Group, LME, IPE, and SGX operate as independent operating subsidiaries of ICE.
What is GSX?
GSX Group is a holding company that operates several stock market exchanges. GSX Group operates the trading platforms LME, IPE, and SGX. GSX Group also owns and operates the trading platforms known as:
London Metal Exchange (LME)

Singapore Exchange (SGX)

International Petroleum Exchange (IPE)

ICE also operates the New York Stock Exchange (NYSE), NYSE Arca, and Euronext. GSX Group owns and operates the trading platforms LME, IPE, and SGX.
GSX Group, LME, IPE, and SGX are all part of ICE. GSX Group, LME, IPE, and SGX operate as independent operating subsidiaries of ICE.
What Is GSX?
GSX is a stock exchange based in London. GSX began as a joint venture between five metals traders in 1986. GSX Group acquired LME in 2007.
GSX had humble beginnings. It was founded in 1986 as a joint venture between five metals traders. The exchange struggled at first, and it was not until the late 1990s that it began to attract significant trading volumes. GSX Group acquired LME in 2007.

GSX and CME Group

In 2012, the Chicago Stock Exchange (CHX) filed a complaint with the Commodity Futures Trading Commission (CFTC) accusing CME Group, owner of Chicago Mercantile Exchange (CME) and CBOT, of anti-competitive practices.
CHX was accused by CME of using a "big pool" position limit order (POLO) program to unfairly reduce competition. POLOs work by setting up a static number of orders to be filled at or close to the best price.
POLOs allow a trader to buy 10,000 shares of a given stock at once, but as long as that share is not sold, the total number of shares that can be bought or sold remains fixed.
According to the complaint, CME's POLOs allowed traders to buy up 1,000 shares of a given stock but sell only 100 shares, which effectively blocked other traders from buying or selling more shares.
CME Group denied CHX's allegations, saying it did not violate the law.
In 2013, an administrative law judge ruled in CME Group's favor. The judge said that CME Group's POLOs did not harm competition, and, "despite CHX's assertions to the contrary, there is no evidence that CME Group's POLOs ever prevented CHX customers from buying or selling 100 shares of a given security."

The Lawsuit

In 1995, the Financial Industry Regulatory Authority (FINRA) fined Goldman Sachs and Morgan Stanley $160 million for their use of "unreasonable and unfair" practices in the pricing of stocks.
In 1997, GSX Exchange, then known as the National Association of Securities Dealers Automated Quotations (NASDAQ), filed a class-action lawsuit against Goldman Sachs, Morgan Stanley, and Dean Witter Reynolds.
The Class
The damages sought in the lawsuit were said to be in excess of $100 million.
In 1998, GSX Exchange and NASDAQ filed a conditional settlement under which they agreed to pay $160 million and $20 million, respectively, to settle the matter.

Should GSX Have Succeeded?

The NYSE Euronext (NYX), the parent of the New York Stock Exchange, tried unsuccessfully to sue GSX in 2001. The NYSE argued that GSX's eSpeed service breached an agreement in which NYX agreed to share its trading technology with NASDAQ.
A judge ruled that NYX could not sue GSX, saying:
The eSpeed trading system, as presently constituted, does not infringe any intellectual property rights owned by NYSE.

The eSpeed trading system does not infringe any intellectual property rights owned by NYSE.

The eSpeed trading system does not breach, or threaten to breach, any proprietary trading or confidentiality obligations of any proprietary trader.

The eSpeed trading system does not, or threaten to, violate NYSE's proprietary rights.