Known as D-Limit, IEX says 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. A limit order is an order to buy or sell a stock at a determined price or better.
However, Citadel Securities is arguing D-Limit 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 is owned by billionaire Ken Griffin.
To make its case about how retail investors can be harmed by D-Limit, Citadel Securities compared it to shopping at a store.
“Imagine a grocery store that has deliberately installed extra-long conveyor belts on its checkout lines,” the company argues in the filing. In theory, the store could use that extra time to determine if any items have sold out at rivals’ stores.
“If so, the store’s computers quickly raise its own price before your item reaches the cashier,” the filing says.
‘Predatory’ trading strategies
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.
“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.”
A Citadel Securities spokesperson pointed to an October statement in which the firm said 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.”
Although D-Limit won unanimous support from the SEC, some companies warned the agency in comment letters not to approve the rule.
Nasdaq, a rival exchange to IEX, slammed D-Limit as “nothing more than a thinly veiled attempt by IEX to bolster its dismal market quality for displayed orders.”
Elizabeth Warren raises questions about Robinhood, Citadel
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.
‘You’re the product’
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.
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.”