The Supreme Court of the United States

In Re. Public Law 98 (High Frequency Trading Regulation of Act)

Case No. 16–09, 100 M.S. Ct. 119

BSDDC, J., delivered the unanimous opinion of the Court.

An alarm blares, waking our protagonist stock broker, who then prepares for the day ahead. Out of the door at eight, he arrives on the floor the New York Stock Exchange an hour before opening. Peering over the newspaper he takes note of the unemployment figures and becomes engrossed in an article relating stories about the low wages around the nation. This has not been a great week for trading; a sense of looming dread consumes his thoughts as the exchange is gaveled open.

It is October 29, 1929, and by the end of business nearly 16,000,000 shares would be sold and traded by investors. Billions of dollars will be lost, investors left with nothing, and the United States — not to mention the world — prepares to enter a long, cold, and Great Depression. [1]

I. Introduction

Congress recognized “that following the 2010 flash crash . . . High Frequency Trading firms (HFT) manipulate the market hurts [sic] small investors everywhere,” and thusly adopted the High Frequency Trading Regulation Act (“Act”). President /u/HammerandPotato did not sign or veto the Act and it became law.

The Act regulates quote stuffing, flash trading, and high frequency transactions by using, inter alia, holding requirements and hefty penalties for infringement. Section 1 reigns in the practice of quote stuffing by requiring that all financial securities are held for “no less than 10 second [sic].” Section 2 implements trading curbs on large stock exchanges which meet or exceed a capitalization of $100,000,000,000. Section 3 prohibits the practice of flash trading, and Section 4 requires that all financial securities purchased by an entity are held by that entity for no less than two seconds. We are also provided with definitions for flash trading, opening day trades, and IPOs.

We must answer two questions regarding this Act: (1) is the text so ambiguous as to render the High Frequency Trading Regulation Act unconstitutionally vague; and (2) do the holding time requirements in Sections 1 and 4 constitute a taking under the Fifth Amendment?

First, Petitioner was apparently hoping for more elucidation from Congress in the definitions section, and challenges the Act on vagueness grounds. See Pet’r br. Respondent argues that any vagueness argued by the Petitioner can be eliminated through the use of statutory interpretation — namely our plain reading and harmonious reading canons. See Resp’t reply br.

Second, Petitioner also avers that the holding time requirements constitute a taking under the Fifth Amendment. See Pet’r br. Respondent disputes this conclusion, and argues that Congress’s regulation here does not amount to a taking under our famous Penn Central framework. See Resp’t reply br.

II. Judicial Standard

A. Vagueness Doctrine

We have had several recent opportunities to write about the vagueness doctrine, and we encourage all members of our bar to read these decisions before filing briefs with this Court. First, when evaluating the Gang Activity Prevention Act we laid out the general framework regarding the vagueness doctrine. The general test is whether or not the text of the law provides clear notice to potential defendants that their conduct is prohibited. In re. The Gang Activity Prevention Act, 100 M.S. Ct. 115 (2016) (citing Kolender v. Lawson, 461 U.S. 352, 357–58 (1993)).

There we recognized that not every meaning must be readily apparent, but instead that the text must make sense when examined against “the evil the act was meant to prevent.” Id. (citing Matter of Banks, 244 S.E. 2d 386 (N.C. 1978) (cert. denied)). Accordingly, we reasoned that “organized crime group” was a sufficient definition under our vagueness doctrine when we applied our plain meaning canon of construction. When passing judgement on the Gang Activity Prevention Act, we also examined the illustrative case of Desertrain v. City of Los Angeles, where an extremely ambiguous city ordinance imposed criminal sanctions. Id. (citing Desertrain v. City of Los Angeles, 754 F.3d 1147 (9th Cir. 2014)). The statue in question in Desertrain invited capricious enforcement of the law which targeted certain individuals while exempting others from punishment. Id. The broad reach of the text could be used by law enforcement as a means of targeting homeless people while at the same time could be read to exempt other non-homeless citizens from punishment. We are a nation ruled by law and reason, not by arbitrary emotion.

Accordingly, we held that a vague statute will be void in two circumstances: (1) when clear notice to potential defendants is lacking; and (2) when the text of the statute invites capricious enforcement of the law. In re. Gang Activity Prevention Act, supra. Additionally, we reasoned that notice to potential defendants need not be perfectly clear when the law is first passed, but instead can be polished by future decisions of the courts when passing judgement pursuant to those criminal statutes. See id.; see Matter of Banks, supra.

We have reaffirmed that no act need be perfectly clear to withstand our judgement. In re. Conversion Therapy Prevention Act of 2015, 100 M.S. Ct. 118 (2016). There, although the text was “certainly vague,” it was not “unconstitutionally vague.” Id. We decided that the meaning of “conversion therapy” was ambiguous, but when read in concert with the evil the act was meant to prevent — forced sexual preference and gender identity therapy — Congress’s intent became clear. Id. And although the law was voided on other grounds, we found the text there to be sufficient under our vagueness doctrine.

Therefore, let it ring out into all corners of this Country, that the standard under our vagueness doctrine is not exacting; Congress may not use broad language to invite arbitrary enforcement of the law and the text must be clear enough to put the reasonable person on notice.

B. The Takings Clause

We have also had recent opportunity to reexamine our takings clause doctrine. In re The Stonewall Inn National Park Act, 100 M.S. Ct. 116 (2016). No opinion from that case commanded a majority, and it does not guide our decision today. That case dealt with the federal Government’s interest in promoting morals and general welfare when naming a federal park; this case deals with a regulation of the securities and financial transactions market. The former is not clearly within Congress’s regulatory powers, the latter is.

Our decisions have applied different modes of analysis depending on the type of taking alleged. Physical takings, such as a permanent governmental intrusion on property — a per se taking — are not examined the same way as regulatory takings. See Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992). If property has not been physically intruded upon, but instead the taking alleged is a loss of value because of regulation, we apply our regulatory taking framework. A regulatory taking can occur when there is a “total taking” of land which deprives the user of all valuable economic use. Lucas, supra. However, if a total taking has not occurred we engage in what is essentially an ad hoc, factual inquiry. Penn Central Transp. Co. v. New York City, 438 U.S. 104 (1978). This test is applicable for tangible personal property, and here, where the value of the property has not been entirely destroyed, the Penn Central test governs our analysis. See generally Ruckelshaus v. Monsanto, 467 U.S. 986 (1984).

Under Penn Central, we examine the following: (1) the economic impact of the regulation on the property owner; (2) the degree of interference with the owner’s investment-backed expectations, and (3) the character of the Government action. Penn Central, supra; see also Philip Morris, Inc., v. Reilly, 312 F.3d 24 (1st Cir. 2002).

While the first prong of the analysis is rather clear, the remaining two factors are not as neatly examined. Id. As such, no two Penn Central cases can be readily compared. Regardless, we will now attempt to glean several of the doctrine’s contours to guide the courts below.

First, the degree of interference with investment backed expectation can be greatly reduced if the regulation predates the acquisition of the regulated property. While this factor is not dispositive under the interference prong, if the regulation does predate acquisition, a taking is much less likely to have occurred. See Schooner Harbor Ventures, Inc. v. United States, 569 F.3d 1359, 1366 (Fed. Cir. 2009).

Second, the courts below have found that not every investment is worth protecting; instead the courts have focused on only guarding what are reasonable expectations when investing. Philip Morris, supra. We find this to be a logical conclusion of the Penn Central analysis, and it is one that should be embraced.

Third, when examining the character of the Government action we generally weigh the cost imposed privately against the aggregate benefit gained by the regulation. However, this factor should not guide decisions ultimately, as it admittedly invites a large amount judicial discretion into an already malleable standard. Although we do not seek to change the fundamental basis of the Penn Central analysis, we do encourage the courts below to apply these factors with rigor and to make principled decisions even against the “ad hoc” background that is the Penn Central test.

III. Discussion

A. Vagueness in the Act

Petitioner’s assertion that the law is “vague and over-broad” does not persuade us. His first contention that “per violation,” as used in the Act, is unclear is not tenable. The plain meaning of per violation is that for each and every violation of the act the fine will be imposed. This happens when the related regulation, part I of Section 1 for example, is contravened. As such, if a purchase of financial securities is not held for ten seconds or more, then a violation has occurred. A violation would, therefore, occur every time a transaction occurs which violates the regulation — not per security traded. The plain meaning of the language informs this court, a reasonable man, and more than informs potential defendants who are already working in a highly regulated field. More importantly, once enforced and interpreted by a lower court the terms will be even clearer to possible defendants.

Petitioner also argued that parts of the Act — Sections 1 and 4 — are in conflict. But as Respondent proposed to this Court, the regulations of Section 1 and Section 4 are entirely separate regulations which relate to quote stuffing and high frequency transactions respectively. There is not conflict between the two regulations — even if there is overlap. While Section 1 seeks to regulate the practice of quote stuffing, which relates to the manipulation of stock prices by flooding a market, it does not follow that the same regulation will apply to the high frequency transactions of Section 4. However, the ten second requirement would govern if the entity were engaging in quote stuffing while using high frequency transactions to flood the market.

Because these regulations are not mutually exclusive, nor in conflict, and have a plain and apparent meaning which does not invite prosecutorial abuse this law is not unconstitutionally vague. Petitioner also points to the lack of definitions for the terms “parameters” and “trading curbs” as a source of vagueness. But this argument does not acknowledge that the Securities and Exchange Commission will be tasked with enforcing this law, and will likely provide the very definition that Petitioner seeks. Again, no law must be perfectly clear to be constitutional. This law provides both notice and does not invite arbitrary enforcement, and it is therefore not void for vagueness.

B. Taking Analysis

To begin, the action by Congress here cannot be fairly described as a total taking under Lucas. Accordingly, we must delve into the ad hoc and fact intensive inquiry that is Penn Central’s three factor analysis. We conclude that because the duration of the alleged takings is negligible, the interference with investment expectations is minimal, and the Congress regulated pursuant to a legitimate federal interest that no taking has occurred. Ultimately we cannot stress enough that every regulation of property can devalue that property in some way, but that does not mean a taking has occurred. And, it is important to note that here we deal with personal belongings, not land. While the same examination is used for both forms of property, an interest in land should be afforded much greater weight.

First, we must examine the burden imposed upon the property owner by the regulation. The alleged taking here comes from a required minimum holding requirement of ten seconds when the quote stuffing of securities transactions is involved. If the entity is not trying to flood the market, the minimum holding time is two seconds. Congress imposed the regulations in an attempt to curb what it determined to be the damaging effects of high frequency transactions. Perhaps ten seconds may decrease the value of stocks significantly, but more likely it hampers the ability of entities to engage in securities manipulation. Under our jurisprudence we only examine whether the regulation disrupts the value of a good in regards to the owner’s general use. Securities manipulation is, by definition, not a general use.

Moreover, the alleged taking of the personal property here is only ten seconds at most. Holding that any and all brief deprivations of personal property by the Government are takings would create an untenable standard. A police officer who withholds a suspect’s firearm would have violated the takings clause; when the FBI seizes equipment from a meth lab they would have taken this property. Not all seizures and regulation of personal property are a taking, this must be true for our Government to function. Here, the burden is incredibly small, and does not carry much heft under the remainder of our analysis, and accordingly it weighs against Petitioner.

Second, we cannot say that this regulation will interfere greatly with investment backed expectations. Keeping in mind that what Congress sought to regulate with this Act was securities manipulation, we cannot say that the purchase of securities for the purpose of quote stuffing is a reasonable expectation of the investor. Our analysis is further supported by the fact that all of the alleged takings created by this law must logically occur after the law has been passed. This means that the acquisition of the securities occurs after the regulation is imposed, which, as mentioned above, weighs against Petitioner.

Finally, we must determine the character of the Government action. The takings clause is in our Constitution to prevent costs which should be absorbed, in all fairness, by society as a whole from being placed on any one individual. See generally Calder v. Bull, 3 U.S. 386 (1789). The cost imposed by this act is a ten second burden on those who purchase securities. In ten seconds it is entirely possible that the value of a stock may plummet. This could destroy a person’s entire investment scheme — even their life. However, the Act before us seeks to stabilize the securities market, and we do not lightly challenge the policy determination of Congress.

In 1929 and then again in the late 2000’s the securities markets obliterated a vast amount of wealth. These tools have the power to create and build as much as they have the capacity to destroy. Regulation of these markets allows Congress to support and enhance the benefits of securities trading while diminishing their destructive capabilities. We need not address the scope of Congress’s regulatory power in this market because this regulation is so clearly within its reach. As such, although the holding requirements could impose a cost on individuals, Congress has determined that overall the chosen legislation will do more good in the aggregate. Even though this factor is the least important of the three under Penn Central, we find that it too weighs against Petitioner.

Overall, we cannot say after our factual investigation of the situation before us that a taking has occurred under Penn Central. We would caution against reading our holding as a bright line rule based on time in all cases; however, when it comes to personalty such as securities this decision could guide the way.

IV. Conclusion

Petitioner asks us to void the law for vagueness, or in the alternative declare it a taking. Because we find the law provides sufficient notice, we cannot call it vague. And in the light of our Penn Central analysis, we cannot call this act a taking. Therefore, we cannot agree with Petitioner that this law must be stricken. Instead we uphold this law in its entirety.

It is so ordered.

[1] Stock Market Crash of 1929, http://www.history.com/topics/1929-stock-market-crash (last visited Aug. 22, 2016).