By Jacob Bunge
Four of the biggest stock-options trading firms in the U.S. on
Thursday sued exchanges over fees that the firms said were
improperly collected for seven and a half years.
Citadel LLC, Susquehanna Investment Group and two other firms
aim to recover fees spanning millions of orders that they argue
were wrongly charged by options exchanges, which have refused to
pay the money back, according to the complaint.
"[T]he dispute arises from the Exchanges' assertion that they
are entitled to mischarge their members without taking any
responsibility for it and without any liability under the law,"
lawyers for the trading groups wrote in the lawsuit.
The matter arose after exchanges last year levied $6.4 million
in fines on Goldman Sachs Group Inc. (GS) for improperly submitting
stock-options orders over a period of six years. The bank was
accused of incorrectly marking trade orders on behalf of client
broker-dealers and market-making firms, instead calling them
"customer" orders, due to a long-running system issue.
The customer designation meant that such firms improperly
collected payments from exchanges, typically directed toward
brokers as an incentive for sending customer orders to exchange
platforms. The money for such payments comes from fees that
exchanges impose on market-making firms, and the lawsuit filed by
the traders this week seeks to recover those fees, which were
estimated to range between 10 cents and $1 per contract.
The traders' lawsuit referred to "one of the Exchanges'
prominent member firms" that incorrectly marked orders as
originating from customers.
"Belatedly, the Exchanges now recognize that they were
improperly charging [payment for order flow] Fees on the Market
Makers on the mismarked orders; however, the Exchanges have not
reimbursed any of the improperly charged PFOF Fees to the Market
Makers," lawyers for the trading firms wrote in the complaint.
Exchanges "conferred" after the firms aired their concerns but
"refused to reimburse" the firms, according to the complaint. The
firms' lawyers wrote that they weren't sure how much in fees was
improperly collected by the exchanges.
The case is likely to add to scrutiny of the so-called "payment
for order flow" model, where exchanges pay brokers to receive their
customers' trades, an attractive lure for professional traders.
Critics have said the structure creates potential conflicts while
providing few benefits to the individual investors who place the
prized orders.
Exchanges targeted in the suit include the Chicago Board Options
Exchange, the International Securities Exchange as well as markets
run by NYSE Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ). The
CBOE is owned by CBOE Holdings Inc. (CBOE) and ISE is a unit of
Deutsche Boerse AG (DB1.XE, DBOEF).
Pursuing the lawsuit alongside Citadel and Susquehanna in the
lawsuit were trading firms Ronin Capital LLC and Group One Trading
LP.
Representatives for NYSE, CBOE and the ISE declined comment.
Representatives for Nasdaq had no immediate comment.
The lawsuit was earlier reported by Bloomberg News.
Write to Jacob Bunge at jacob.bunge@dowjones.com
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