Commentary June 03, 2022 at 07:44 AM Share & Print
What You Need to Know
- The combined companies maintain half of the retail order flow in the U.S., decreasing competition, according to the suit.
- Since the merger, retail customers have made less money from their trades, the lawsuit says.
- Plaintiffs have also faced increased transaction costs.
Charles Schwab was hit Thursday with an antitrust class-action lawsuit claiming that its merger with TD Ameritrade has “substantially decreased” competition, with a significantly less transparent payment for order flow process that causes customers to make less money through trades while paying higher transaction costs.
In today’s commission-free trading world, “retail brokers — who make huge profits selling customers’ order flow — compete for retail investors’ business by remitting a share of this payment for order flow to customers as part of each trade, through rebates, price improvement, or some combination,” the lawsuit states.
According to the suit, filed in the U.S. District Court for the Eastern District of Texas, the Schwab-TD Ameritrade merger “has created an unprecedented market concentration in which the merged entity has captured and maintained fully half of the retail order flow in the United States, which has substantially decreased this competition — if not ended it completely.”
The lawsuit “seeks to remedy the damage inflicted by the anti competitive combination” of two of the largest retail brokerages in the United States in October 2020.
These brokerages cater to retail investors, the lawsuit states, “and while they do not charge commissions, they profit by selling Plaintiffs’ and the Class’ trades — their order flow — to market makers, who then trade against them for profit.”
As a result of the merger’s “anti competitive effects, retail customers — including Plaintiffs and the Class Members — have made less money from their trades through rebates or price improvements,” the lawsuit asserts.
The plaintiffs and class members, it continues, have also: “faced increased transaction costs, including through being traded against by market makers using retail customers’ own data; have faced even-further-decreased transparency in where their orders are going, what their order flow information is being used for, and how much money is being paid to their brokers for this information’s sale; and have even less control and choice regarding how their trades are handled, and on what cost basis.”
By acquiring TD Ameritrade, Schwab, according to the suit, “had captured the lion’s share of order flow payments across retail investment platforms. TD Ameritrade alone received approximately $1.15 billion in order flow payments in 2020, approximately 42% of the $2.752 billion in order flow payments made that year.”
Schwab, in comparison, “had approximately 9% of the order flow payment share in 2020. Combined, the companies received just more than half of all the order flow payments made by market makers to retail brokerages in 2020,” the suit states.
The two companies together “provided the largest aggregation of retail order flow from individual investors in the United States in 2020,” the suit states, with the next highest share belonged to Robinhood, “at 25% of all payments for order flow in 2020.”
The companies together maintained approximately half of the order flow in 2021 as well, with TD Ameritrade at about 39% of the $3.6 billion in order flow paid in 2021 and Schwab at 9%, according to the suit.
“While order flow payments grew approximately 32% from 2020 to 2021,” the suit states, “the combined companies maintained their combined share of approximately half of those payments.”
In a statement, Schwab said that the “allegations in this complaint, while salacious, are meritless and we look forward to demonstrating the value and appropriateness of our approach in court. Any suggestion that the combination of these two client-centric firms has led to less favorable outcomes is simply untrue and ignores facts. The descriptions about payment for order flow are false and appear to be nothing more than an obvious effort to garner media attention.”
Payment for order flow, Schwab said, “is a legal practice governed by SEC and FINRA rules to promote both best execution and proper disclosure.”
Schwab added: “The value Schwab clients receive in order execution is on par with or exceeds industry averages. Schwab’s approach to order execution actually disconnects revenue and execution quality and we require that third parties compete for our order flow based on execution quality, not dollars. As a result of our approach, Schwab clients receive billions of dollars annually in price improvement on their orders, well in excess of any financial benefit to the firm. For every dollar in revenue we received from third parties in 2021, our clients received $6.50 in price improvement.”