Options market makers sue exchanges alleging overpricing

The companies sued Chicago Board Options Exchange LLC and four other exchanges, claiming they systematically overcharged or misjudged fees on trades from January 2004 to June 2011.

The exchanges knew in late 2012 that one of their members had misidentified requests to buy and sell options as coming from public clients, when in fact they came from professionals, according to the complaint filed in court on Wednesday. of Chicago State.

This is not a situation where they say you messed up my trade and therefore I lost money, they say you charged me something you shouldn’t have charged me for, James J.Angel, professor of finance at Georgetown University, said in a phone interview. They thought they were trading against the retail trade, and now two things turn out: first, they were incorrectly charged, and second, it wasn’t even a customer order.

When confronted, the exchanges simply asserted that they had no responsibility and could not be held liable for the abusive overcharging of fees, according to the market makers‘ complaint.

Incentive prizes

The case centers on the pricing incentives adopted by stock exchanges over the past decade and a half as technical advances and regulatory reform reduced profits in stock and options trading and the number of markets has multiplied.

Among these are systems that reward brokers for bringing orders from individuals and charge others for the privilege of executing against them.

Defendants in the lawsuit include International Securities Exchange LLCthe NYSE Arca electronic options exchange owned by NYSE Euronext and the NYSE Amex exchange and the Philadelphia Stock Exchange operated by the NASDAQ OMX Group.

Gail Osten, spokeswoman for the Chicago Board Options Exchange, today declined to comment on the allegations.

Molly McGregor, an ISE spokeswoman, declined to comment on the lawsuit. NYSE Euronext spokesman Rich Adamonis and Nasdaq spokesman Rob Madden also declined to comment.

The exchange member company that allegedly incorrectly marked the orders as coming from public clients when they came from brokers and other professionals during the time period in question was not named in the complaint. The company was ordered to pay nearly $6.4 million in penalties and an undetermined amount of transaction fees, the plaintiffs said.

Goldman Agreement

According to a consent letter posted on the CBOE website in September 2012, Goldman Sachs Group Inc.. agreed to pay $6.75 million to eight U.S. stock exchanges to settle claims over its handling of options trading from January 2004 to May 2010.

The New York-based securities firm mislabeled some options orders as coming from clients rather than brokers or market makers, according to the document. Goldman Sachs was censored by the exchanges and neither admitted nor denied wrongdoing. Michel Du Vallya Goldman Sachs spokesman declined to comment on yesterday’s lawsuit.

Joining Citadel in the deal are Chicago-based Ronin Capital LLC, San Francisco-based Group One Trading LP, Susquehanna Investment Group and Susquehanna Securities.

Refund requested

The market maker plaintiffs said they were seeking to recover or return all payments for order flow and other fees improperly charged by exchanges. The plaintiffs also requested an account of fees wrongly charged and a statement that exchanges are required to follow their own rules regarding fees.

Stock exchanges enjoy immunity for actions taken in the course of their regulatory functions. The doctrine originated when stock and options markets were non-profit organizations owned by their member companies. The shield protects them from lawsuits related to the exercise of powers delegated by the US Securities and Exchange Commission and prevents financial losses that could jeopardize institutions considered vital to the US economy.

Exchanges have an extremely limited responsibility in such cases, Andrew Stoltman, a Chicago securities attorney, said in an email. It is always a climb to the rope during an exchange. Contracts between stock exchanges and securities firms are heavily tilted in favor of the stock exchange. Liability will probably be extremely difficult to establish here.

17.2 million traded

Options trading in the United States is spread across 11 markets. An average of $17.2 million traded daily in the United States in January, the second highest figure for the first month of a year, according to Options Clearing Corp.

The volume represents an increase of 8.2% over last year’s average. Options trading fell in 2012 to a daily average of 15.9 million contracts from a record 18.1 million in 2011, according to data from the Chicago-based show OCC.

Katie Springa Citadel spokeswoman, did not immediately respond to phone and email messages seeking comment on the lawsuit.

David Pollard, a spokesperson for Susquehanna, did not respond to a phone call seeking comment. A voicemail message left at Group One Trading’s main office number was not returned.

The case is Citadel Securities LLC v. Chicago Board Options Exchange Inc., 13CH13246, Cook County Circuit Court, Chancery Division (Chicago). BLOOMBERG

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