Citadel Securities Sues SEC, Escalating Fight Over IEX Order

Citadel Securities LLC sued the U.S. Securities and Exchange Commission over the regulator’s approval of an order type introduced by stock-exchange operator IEX Group Inc.

“The SEC failed to properly consider the costs and burdens imposed by this proposal that will undermine the reliability of our markets and harm tens of millions of retail investors,” Citadel Securities said in a statement after the petition was filed Friday with the U.S. Court of Appeals in Washington.

The move escalates an equities-industry debate over IEX’s discretionary limit order type, or D-Limit, which it launched on Oct. 1 as a way to protect liquidity providers, institutional investors and market makers from trading strategies that rely on fast data connections to gain advantage. The SEC, which approved D-Limit in August, declined to comment.

“D-Limit is already proving valuable to a broad set of market participants and the SEC’s decision to approve it is based on overwhelming evidence and support from brokers and investors representing over 100 million beneficiaries,” Ronan Ryan, IEX’s co-founder and president, said in a statement. “We are confident it will be upheld. From our perspective, this recent action should only encourage more investors, brokers, and market makers to use D-limit given that the protections we have created are clearly working.”

Citadel Securities, which said it’s a top-five market maker on IEX’s exchange, argued in a series of comment letters that D-Limit would create unfair advantages for both IEX and the trading firms using the order type. It’s now asking the court to review the SEC’s decision. Other opponents of the order type included the FIA Principal Traders Group, Nasdaq Inc. and Hudson River Trading LLC.

IEX, made famous by Michael Lewis’s “Flash Boys,” was backed in its proposal by the Council of Institutional Investors, whose members manage combined assets of about $4 trillion, along with Goldman Sachs Group Inc., Virtu Financial Inc. and Vanguard Group Inc.

Stock exchanges have prevailed in legal challenges against the SEC on market data fees and a government pilot program to study rebates in recent months, potentially setting a precedent for Citadel Securities and others looking to question the regulator’s decisions.

“I don’t disagree with Citadel, but it’s a far step to sue your regulator,” said Larry Tabb, head of market structure research for Bloomberg Intelligence. “This opens the door to cherry-picking the rules that you like and when you get an adverse outcome, you sue. This will make rule-setting very difficult as there is always an unhappy party and if everyone starts suing, it becomes impossible to get anything done.”

Citadel Securities analyzed data showing D-Limit could have an adverse impact on retail orders. It likened D-Limit to last look, a practice in currency markets in which dealers can back out of losing trades. It also drew parallels between IEX’s move and a speed-bump proposal by Cboe Global Markets Inc., which was shot down in February.

IEX, a vocal critic of older exchanges, rejected those arguments in its comment letters. It called Citadel Securities’s data “selective, uncontextualized and ultimately irrelevant,” and representing the view of only one market participant in contrast with broader support for IEX’s proposal. D-Limit offers the potential for “more stable, and less fleeting, liquidity,” IEX said.

©2020 Bloomberg L.P.

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