High-speed trading firm linked to Robinhood is going to war with the SEC

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Citadel Securities is under the microscope over its relationship with Robinhood. But the high-frequency trading firm is not laying low.

On the same day that Senator Elizabeth Warren demanded answers on Robinhood’s ties to Citadel Securities and its affiliated hedge fund, the Chicago-based firm officially launched a legal war Tuesday against the Securities and Exchange Commission.

In previously unreported court documents, Citadel Securities asked a court to overturn the SEC’s bipartisan approval of a trading method launched by IEX Group, the exchange made famous by Michael Lewis’ book “Flash Boys.”

Known as D-Limit, the order type is designed to help protect investors from predatory trading strategies. Short for discretionary limit, IEX says D-Limit acts like a regular limit order except when the exchange’s algorithms predict a price is about to change.


However, Citadel Securities is arguing it does the opposite of protecting investors. In 77 pages of court documents filed Tuesday, Citadel Securities accused the SEC of having “ignored” evidence that retail investors would be “harmed” by the D-Limit order. The firm cited its own analysis that found more than half of its trading activity on IEX was on behalf of retail investors, not for its own profit.

Citadel Securities, a major source of revenue for Robinhood, filed its intention to sue in October and this week’s brief follows through on that threat.

The SEC did not respond to a request for comment. IEX said it looks forward to responding to the Citadel Securities filing and pointed to public trading data that it says shows D-Limit delivers better trading results and pricing to investors.

‘Predatory’ trading strategies

The claims by Citadel Securities come despite the fact that last year Republicans and Democrats at the SEC unanimously approved the rule, which was also backed by large pension funds and asset managers like T. Rowe Price.

D-Limit was even blessed by Better Markets, the tough-on-Wall-Street nonprofit run by Dennis Kelleher, who was on President Joe Biden’s transition agency review team.

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

Kelleher said D-Limit would shield investors specifically from Citadel Securities — and by extension hurt the firm’s booming revenue.

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

IEX was founded in March 2012 by former Wall Street executive Brad Katsuyama, a central character in Flash Boys, which made the case that high-speed traders are preying on mom-and-pop investors. IEX was approved as an exchange in August 2016.

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

Elizabeth Warren raises questions about Robinhood, Citadel

The lawsuit comes as scrutiny intensifies on Citadel Securities in the wake of the Reddit-driven market volatility and Robinhood’s controversial decision to temporarily suspend purchases of GameStop, AMC and other stocks backed by WallStreetBets.

Treasury Secretary Janet Yellen summoned federal regulators to look into the market turbulence this week and lawmakers have called for an investigation.

Robinhood, which championed the free-trading business model that is now common in the industry, has repeatedly said that its trading restrictions on GameStop were driven by soaring financial requirements during the market volatility, not at the behest of Wall Street firms hurt by the GameStop rally.

But Warren, a Democrat from Massachusetts, said Robinhood’s trading limits on small investors “raises troubling concerns about its relationship with large financial institutions that execute its trades.”

Specifically, Warren pointed to Robinhood’s ties to Citadel Securities, the market maker and high-speed trading firm owned by billionaire Ken Griffin.

‘You’re the product’

Like other brokerages, Robinhood gets paid to route orders to market makers, a controversial practice known as payment for orderflow. 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, enabling them to trade ahead of those retail flows.

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

Another entity owned by Griffin, the hedge fund Citadel, provided a $2 billion bailout to GameStop short-seller Melvin Capital Management after its bets blew up.

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

In a statement, Citadel Securities said it has not “instructed or otherwise caused any brokerage firm to stop, suspend or limit trading or otherwise refuse to do business.”

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