Wall Street firm linked to Robinhood will go to war with the SEC to derail the Flash Boys scholarship

Known as D-Limit, IEX says the order type is designed to help protect investors from predatory trading strategies. Abbreviation for discretionary limit, IEX says that D-Limit acts as a regular limit order, except when stock exchange algorithms predict that a price is about to change. A limit order is an order to buy or sell a stock at a certain price or better.

However, Citadel Securities is arguing that D-Limit does the opposite to protect investors. In 77 pages of court documents filed on Tuesday, Citadel Securities accused the SEC of “ignoring” evidence that retail investors would be “harmed” by the D-Limit order. The company cited its own analysis, which found that more than half of its business activity at IEX was on behalf of retail investors, and not for its own profit.

Citadel Securities, a major source of revenue for Robinhood, presented its intention to sue in October and this week’s report follows up on that threat. The market maker and high-speed trading company is owned by billionaire Ken Griffin.

To show how retail investors can be hurt by D-Limit, Citadel Securities compared it to shopping at a store.

“Imagine a supermarket that has deliberately installed extra-long conveyor belts on its cash lines,” argues the company in the process. In theory, the store could use that extra time to determine if any items were sold at rival stores.

“In that case, the store’s computers quickly increase their own price before their item reaches the checkout,” says the suit.

The SEC did not respond to a request for comment. IEX said it expects to respond to Citadel Securities’ request and pointed to public trading data that it says show that D-Limit offers better trading results and prices to investors.

‘Predatory’ trading strategies

Citadel Securities’ claims come despite the fact that SEC Republicans and Democrats unanimously approved the rule, which was also supported by major pension funds and asset managers like T. Rowe Price.
D-Limit was even blessed by Better Markets, the tough Wall Street nonprofit run by Dennis Kelleher, who was part of President Joe Biden’s transition agency review team.

IEX’s D-Limit, along with other exchange technology, can “protect investors from predatory trading strategies,” Lev Bagramian, senior securities policy consultant at Better Markets, told CNN Business via email.

Kelleher said D-Limit would protect investors specifically from Citadel Securities – and, by extension, would hurt the company’s growing revenue.

“Presumably, that’s why Citadel strongly opposed IEX’s D-Limit order type,” said Kelleher.

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IEX was founded in March 2012 by former Wall Street executive Brad Katsuyama, a central character in Flash Boys, who argued that high-speed traders are taking advantage of small investors. IEX was approved as an exchange in August 2016.

“Despite the current environment,” Katsuyama told CNN Business in a statement, “Citadel has moved on in its attempt to reverse the SEC’s approval of an innovation designed to protect all investors from predatory trading strategies.”

A spokesman for Citadel Securities pointed to an October statement in which the company said the SEC “failed to properly consider the costs and charges imposed by this proposal that will undermine the reliability of our markets and harm tens of millions of retail investors. “.

While D-Limit has obtained unanimous support from the SEC, some companies have warned the agency in letters of comment not to approve the rule.

Nasdaq, a rival IEX exchange, criticized D-Limit as “nothing more than a veiled attempt by IEX to reinforce its poor market quality for the displayed orders”.

Elizabeth Warren raises questions about Robinhood, Citadel

The lawsuit comes with the intensification of the scrutiny of Citadel Securities, following the market volatility driven by Reddit and the controversial decision by Robinhood to temporarily suspend purchases of GameStop (GME), AMC (AMC) and other actions supported by WallStreetBets.
Treasury Secretary Janet Yellen called on federal regulators to examine the market turmoil this week and lawmakers called for an investigation.

Robinhood, who defended the free trade business model that is now common in the industry, repeatedly said that his trade restrictions on GameStop were driven by increasing financial requirements during market volatility, not at the behest of Wall Street companies hampered by the GameStop rally .

But Warren, a Democrat from Massachusetts, said Robinhood’s commercial limits to small investors “raise worrying concerns about his relationship with large financial institutions that run his deals”.

Specifically, Warren pointed to Robinhood’s ties to Citadel Securities.

‘You are the product’

Like other brokers, Robinhood is paid to forward orders to market makers, a controversial practice known as payment by order flow. In December alone, Robinhood generated about $ 12.4 million by routing orders to Citadel Securities, according to disclosure forms.

Critics say it is only free to trade on Robinhood because the app sends orders to market makers, allowing them to trade before retail flows.

Within the Reddit army that is crushing Wall Street

“With everything that’s free, you are the product,” Mark Yusko, CEO of hedge fund Morgan Creek Capital Management, told CNN Business earlier this week.

Last year, FINRA, the Wall Street self-regulator, fined Citadel Securities $ 700,000 per deal before customer orders. FINRA said that, over a two-year period, Citadel Securities delayed certain customer stock orders – while continuing to trade those same shares on its own account. Without admitting or denying the findings, Citadel accepted and consented to FINRA’s action.
Another Griffin-owned entity, the Citadel hedge fund, provided a $ 2 billion bailout to GameStop short seller Melvin Capital Management after his bets exploded.

Both Citadel Securities and Citadel, the hedge fund, denied any role in Robinhood’s decision to discontinue GameStop purchases.

In a statement, Citadel Securities said it did not “instruct or otherwise cause any broker to stop, suspend or limit trading or otherwise refuse to do business”.

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