Protocol | Fintech

Who gets to trade fastest? A lawsuit tests who controls the stock market.

Citadel Securities seeks to block IEX's product that limits high-frequency trading advantages.

Kenneth Griffin, founder and chief executive officer of Citadel LLC

Kenneth Griffin is the founder and chief executive officer of Citadel LLC, which argued during Monday's hearing that IEX's D-Limit order type shouldn't have been approved by the SEC.

Photo: Patrick T. Fallon/Bloomberg via Getty Images

Market maker Citadel Securities, stock exchange IEX and the Securities and Exchange Commission each gave oral arguments Monday in a legal case that could have large implications for financial markets.

Last October, Citadel Securities sued the SEC, seeking to reverse the SEC's previous decision last August to approve IEX's D-Limit order type, arguing that this order type would hurt the overall market. The case was argued before the U.S. Court of Appeals Monday.

The D-Limit product is designed to stop high-frequency traders from taking advantage of other orders when market prices are changing.

While the intricacies of stock orders may at first glance seem obscure, they speak to a larger issue of who controls the U.S. capital market structure and who benefits from the ultra-fast trading that dominates financial markets: retail investors, stock exchanges or high-frequency traders? Similar debates are going on over the SEC's current review of payment for order flow and stock exchange rebates, which some have argued decrease competition and hurt pricing for investors.

The D-Limit product is designed for certain orders with so-called displayed prices — high-frequency traders often trade against these orders that are waiting to be filled. At certain times of the day, prices can start to move, and because trading systems are so fast, some high-frequency traders can trade in the one or two milliseconds before the overall market price — known as the National Best Bid and Offer — changes, in order to gain an advantage, IEX says. That's faster than the blink of an eye, IEX's attorney Catherine Stetson said Monday.

This is known as latency arbitrage, a trading strategy that high-frequency traders use to trade at fractions of a second before slower executed orders — and is estimated to cost other investors $5 billion a year, according to the U.K.'s Financial Conduct Authority.

IEX has also argued that latency arbitrage incentivizes traders to trade off on public exchanges or through non-displayed orders, which decreases overall market liquidity and transparency.

The D-Limit product uses data from exchanges to predict when the NBBO is "likely to change in the next two milliseconds," IEX says. If it predicts a bid for a stock will move lower for someone posting a bid, or higher for someone posting an offer, IEX will move the buy price a bit lower than the NBBO and the sell order a bit higher than the NBBO. These times average just five to 10 seconds of the entire trading day but make an outsized impact because a large volume of orders trading against displayed quotes come in these moments, IEX says.

Asset managers, brokers and other market makers such as Vanguard, Goldman Sachs, T. Rowe Price, Jefferies, XTX and Virtu Financial have all supported the D-Limit product.

"Adverse selection stemming from latency arbitrage can have a negative effect on the national market system because liquidity providers may be more inclined to provide less liquidity at wider spreads. The D-Limit order provides a potential solution to this problem," wrote Philip Berlinski, the co-COO of equities and global markets at Goldman Sachs, in a letter to the SEC last year.

In the hearing Monday, Citadel Securities argued that prices are not moving due to latency arbitrage but rather simply due to large blocks of stock which are regularly being traded, which move markets. "Large orders across multiple exchanges cause prices to move," Citadel Securities' attorney Jeffrey Wall said.

Citadel also argued Monday that IEX's D-Limit order type shouldn't have been approved by the SEC because it stops orders from immediate execution as required by law. "The regulation says, 'immediately and automatically executable.' And the whole point of this is they're slowing it down so that it's not immediate, and then instead of automatically executing, they're automatically repricing. They're doing the exact opposite of what the regulation says," Wall said.

The SEC countered Monday that IEX should be allowed to use the D-Limit because it is not that different from other ways that exchanges seek to make trading fair, such as changing the length of a cord to traders' servers in a co-location facility, in order to make the time required for an order to reach an exchange exactly the same.

IEX's attorney Stetson said Monday that the D-Limit order type is an attempt to stop predatory trading. "I think what [Citadel Securities] is seeking is what we would say is unfair access because they are seeking to exploit that tiny moment of time when a price is changing, before other people, other liquidity providers and liquidity takers are able to get there," Stetson said. "This is discrimination against a type of high-frequency trader that engages in predatory latency arbitrage."

The three judges had some pointed questions for the attorneys on both sides, questioning both IEX's right to limit "immediate" trades and Citadel's ability to intervene in stopping the D-Limit product. "You're the one who's trying to kind of regulate your way into a market victory," said U.S. Circuit Judge Justin Walker to Citadel's Wall.

Protocol | Workplace

Google contractor says she was fired for "ungoogley" behavior

According to a charge filed with the National Labor Relations Board, "ungoogley" is Google's term for having a bad attitude.

A contractor at Google staffing firm Modis claims she was fired from her job after asking about pay.

Photo: Future Publishing/Getty Images

A contractor at Google staffing firm Modis claims she was fired from her job for "ungoogley" behavior after asking about holiday pay at a meeting with management, according to a charge filed with the National Labor Relations Board by a lawyer for the Alphabet Workers Union.

Tuesday Carne said in an interview with Protocol that she was fired after just nine days of working in the data contracting facility in South Carolina. Carne's termination letter (which Protocol reviewed) called her behavior at the meeting "unacceptable and 'ungoogley'" and claimed that her behavior was the reason for her firing.

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Anna Kramer

Anna Kramer is a reporter at Protocol (Twitter: @ anna_c_kramer, email: akramer@protocol.com), where she writes about labor and workplace issues. Prior to joining the team, she covered tech and small business for the San Francisco Chronicle and privacy for Bloomberg Law. She is a recent graduate of Brown University, where she studied International Relations and Arabic and wrote her senior thesis about surveillance tools and technological development in the Middle East.

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Protocol | Policy

Biden FCC nominee Sohn is walking a tightrope with Republicans

Gigi Sohn faces plenty of GOP opposition, but the longtime net-neutrality advocate is hoping to pick up a little Republican support as she deals with Democrats’ narrow margins.

Gigi Sohn’s work for net neutrality has become an issue in her confirmation hearings for the FCC.

Photo: Alex Wong/Getty Images

Gigi Sohn wouldn’t mind getting support from a Republican or two, and it’d certainly make her path back to the Federal Communications Commission easier.

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Protocol | Workplace

Microsoft Teams is going after small businesses

Microsoft Teams Essentials offers longer, bigger meetings for a relatively small price tag.

Companies can now buy a standalone version of Teams.

Photo: Mika Baumeister/Unsplash

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Microsoft will charge small businesses $4 per user per month for Microsoft Teams Essentials, while Zoom’s cheapest paid plan is $14.99 per user per month and Slack’s is $6.67 per user each month, when billed annually. The free version of Microsoft Teams still exists, as do the various other Microsoft 365 plans that include Teams. Teams Essentials offers longer meeting times, larger group meetings and more cloud storage.

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Protocol | Policy

5 things to know about NTIA nominee Alan Davidson

If confirmed, the former Googler will play a key role in shaping the unprecedented expansion of broadband across the country.

Alan Davidson has been nominated to lead the NTIA.

Photo: Win McNamee/Getty Images

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