New Market Structure Class Action Lawsuit Focuses on Payment For Order Flow
Last month, another market structure related class action lawsuit was filed. As far as we can tell, this case has not yet been reported in the press. The target of the lawsuit is the online retail broker TD Ameritrade and the subject is payment for order flow and order routing practices. The case, brought by the NJ-based law firm Lite Depalma Greenberg LLC, centers around whether TD Ameritrade provided best execution for their clients.
Here are some of the key points raised by Lite, Depalma, Greenberg case:
-Rather than route its clients’ non-directed, non-marketable orders to
the venue(s) which would provide the best execution, TD Ameritrade instead sent
such orders to the venues which would provide the highest liquidity rebates,
payments made by the venues to TD Ameritrade relating to the number and size of
orders that were routed.
– Rather than route its clients’ non-directed, marketable orders to the
venue(s) which would provide the best execution, TD Ameritrade instead sent such
orders to the venues which would pay the Company for order flow, payments made
by the venues to TD Ameritrade relating to the number and size of marketable
orders that were routed.
– As a result of this self-interested order routing, TD Ameritrade failed
to provide best execution for its clients, causing them material harm in the form of
economic loss due to their orders going unfilled, underfilled, or filled at a
The case points out that in 2011, TD Ameritrade suddenly shifted their order routing practices:
– In the fourth quarter of 2010, according to TD Ameritrade’s Rule 606
Report, the Company routed 62% of limit orders to Citadel Execution Services and
22% of such orders to Citigroup. Both of these venues paid, on average, less than
15 mills per share, where a mill is equal to one-tenth of a penny. That same
quarter, the Company routed 8% of limit orders to Direct Edge, a venue that paid
32 mills. Thus, at that time, TD Ameritrade routed 84% or more of its limit orders
to venues that paid less than half of the highest liquidity rebate available.
– Sensing an opportunity for additional profit, however, TD Ameritrade
radically modified its routing behavior beginning in 2011, and began routing limit
orders to the venues that would maximize their rebates. By the fourth quarter of
2012, TD Ameritrade was directing all of its nonmarketable limit orders to Direct
Edge, which was paying the highest rebate for adding liquidity available at the
– TD Ameritrade’s most recent 606 Report demonstrates that the
Company’s practice of routing orders to the venues which pay the most for order
flow or the highest rebates for the addition of liquidity has continued, and will
likely continue, unabated.
– Direct Edge, to which TD Ameritrade routed roughly half of its clients’ limit
orders in the first quarter of 2014, paid a staggering 35 mills per share (or 35 cents
per hundred shares traded) in liquidity rebates.
– All told, TD Ameritrade Holding Corporation “earned” routing
revenue of $236 million in 2013, $184 million in 2012, and $185 million in 2011,
in the form of liquidity rebates and payments for order flow. These amounts are in
addition to the commissions which TD Ameritrade’s clients paid the Company for
its broker-dealer services.
The lawsuit also references the Battalio Study that we featured last year in a note :
-The Battalio Study authors conclude that their results indicate an
impact of limit order routing decisions on some measures of limit order execution
quality, such that “routing decisions based primarily on rebates/fees appear to be
inconsistent with best execution. There is a significant opportunity cost associated
with routing all nonmarketable limit orders to a single venue offering the highest