Citadel Securities LLC v. SEC

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 25, 2021 Decided July 29, 2022
No. 20-1424
CITADEL SECURITIES LLC,
PETITIONER
v.
SECURITIES AND EXCHANGE COMMISSION,
RESPONDENT
INVESTORS EXCHANGE LLC,
INTERVENOR
On Petition for Review of an Order
of the Securities and Exchange Commission
Jeffrey B. Wall argued the cause for petitioner. On the
briefs were Jeffrey B. Korn, Patricia O. Haynes, Mark T.
Stancil, and Kristin Bender.
Christina M. Carroll, Kristen C. Rodriguez, Douglas W.
Henkin, and Richard M. Zuckerman were on the brief for amici
curiae New York Stock Exchange, LLC, et al. in support of
petitioner.
2
Alexandra A.E. Shapiro and Daniel J. O=Neill were on the
brief for amicus curiae Andrew N. Vollmer in support of
petitioner.
Emily True Parise, Senior Litigation Counsel, U.S.
Securities and Exchange Commission, argued the cause for
respondent. With her on the brief were Michael A. Conley,
Acting General Counsel, Dominick V. Freda, Assistant
General Counsel, and Brooke Wagner, Attorney.
Catherine E. Stetson argued the cause for intervenor. With
her on the brief were Katherine B. Wellington and Reedy C.
Swanson. Sundeep Iyer and Neal K. Katyal entered
appearances.
Dennis M. Kelleher, Stephen W. Hall, and Jason R. Grimes
were on the brief for amicus curiae Better Markets, Inc. in
support of respondent.
Daniel A. Rubens and Alexandra Bursak were on the brief
for amicus curiae XTX Markets, LLC in support of respondent.
Thomas A. Burns was on the brief for amicus curiae
Healthy Markets Association in support of respondent.
Before: RAO and WALKER, Circuit Judges, and SENTELLE,
Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge WALKER.
3
WALKER, Circuit Judge: The Securities and Exchange
Commission approved a recent attempt by a securities
exchange to prevent investors from buying and selling
securities before other investors can know that market prices
have changed.
We deny the petition challenging the SEC’s decision.
I
Gone are the days of stock traders who yelled out orders
from crowded trading floors as they stared at a scrolling
tickertape. Today, securities exchanges are electronic, and
orders move at the speed of light.
This section describes (A) a few basics about those
securities exchanges; (B) some of the rules governing them;
(C) the concept of “latency arbitrage”; (D) an exchange’s new
strategy to protect investors from latency arbitrage; and (E) the
SEC’s approval of that strategy.
A
Securities traders can play two roles: liquidity provider or
liquidity taker. A taker seeks to accept a provider’s “bid” to
buy or “offer” to sell. When all goes well, the trade executes,
meaning the taker either buys what the provider offered or sells
what the provider bid for. A single trader can don and doff a
provider or taker hat at any time.
The trades between providers and takers happen through
orders, which are instructions sent from traders to exchanges.
There are many types of orders. For example, orders can be
4
either “displayed” or “non-displayed,” meaning publicly
viewable or not publicly viewable. And certain orders called
“limit orders” stipulate that a security must trade for a pre-
specified price or better from the provider’s perspective.
Here’s an example that combines some of what we’ve
covered so far: A liquidity provider posts a displayed limit
order on the New York Stock Exchange. The order bids to
“buy 10 shares of Apple stock at $10.00 per share or lower.”
A liquidity taker then sees that bid and sends its own order to
the New York Stock Exchange that accepts the bid and sells the
10 shares of Apple stock for $10.00 per share.
B
In 2005, the SEC promulgated a series of initiatives
dubbed “Regulation NMS,” which stands for National Market
System. One of those initiatives established the concept of the
“[n]ational best bid and national best offer,” which are the best
bid and best offer for a security, from the taker’s point of view,
across all U.S. securities exchanges. 17 C.F.R.
§ 242.600(b)(50). In other words, the national best bid or offer
is the highest-priced bid to buy or the lowest-priced offer to sell
a security on any U.S. exchange.
Regulation NMS also classifies some providers’ orders as
“protected” bids or offers (collectively “protected quotations”).
Protected quotations are “automated,” publicly displayed, and
the national best bid or offer. Id. § 242.600(b)(70).
That classification matters because Rule 611 of Regulation
NMS requires exchanges to implement policies that prevent the
execution of trades for protected quotations that are worse for
the taker than the national best bid or offer. Id. § 242.611(a)(1).
So if a security’s national best bid or offer changes, then the
5
correct execution price for protected quotations of that security
changes as well. As a result, exchanges must constantly
communicate to keep abreast of securities’ nationwide prices.
See Nasdaq Stock Market LLC v. SEC, No. 21-1167, 2022 WL
2431638, at *2 (D.C. Cir. July 5, 2022) (“At the heart of the
national market system is the collection, consolidation and
dissemination of securities market data from the various
securities exchanges.” (cleaned up)).
C
Now speed enters the picture. When a security’s national
best bid or offer changes, providers must update their orders to
reflect that change.
To do so, providers send electronic messages to the
exchanges. Those messages often arrive faster than the blink
of an eye. Still, the updates are not instantaneous. It takes a
moment for an update to reach exchanges all over the country.
That moment is called “latency.”
During that latency, certain high-frequency traders can
take securities at old, stale prices — just before updated prices
reach the exchanges — and then turn around and trade those
securities at the newly updated national best bid or offer. That
practice is called “latency arbitrage.”
The high-frequency traders that engage in such latency
arbitrage are extreme short-term investors. That’s because they
seek to end each trading day with the same investments that
they had at the beginning of the day. See Concept Release on
Equity Market Structure, Exchange Act Release No. 34-61358,
75 Fed. Reg. 3,594, 3,606 (Jan. 21, 2010) (“characteristics
often attributed to proprietary firms engaged in” high-
frequency trading include “ending the trading day in as close
6
to a flat position as possible”). Indeed, they immediately seek
to either (a) sell what they’ve just bought or (b) buy back what
they’ve just sold. For example, according to the Intervenor:
A stock price may be in the process of changing from
$10.00 to $10.01 across different exchanges. A high-
speed trader might swoop in and buy at $10.00 from
an investor that cannot update its quote fast enough,
and then sell at $10.01 – the price the investor could
have received microseconds later if the arbitrageur
had not intervened. That penny that would have gone
to the investor goes instead to the arbitrageur.
Intervenor’s Brief 5-6 (cleaned up).
For ease, we will refer to such extreme short-term
investors simply as “short-term investors.”1 By contrast, we
will call traders that don’t engage in latency arbitrage “long-
term investors.”
D
Investors Exchange LLC — commonly called IEX
— began to operate as a securities exchange in 2016. From the
beginning, IEX has sought to attract business from liquidity
providers by combating latency arbitrage on its exchange.
To do that, IEX uses two tools: a thirty-eight-mile-long
coil of wire called the “speedbump” and a publicly available
algorithm called the “crumbling quote indicator,” which
predicts imminent changes to the national best bid or offer.
1
There are of course less extreme short-term investors who do not
engage in latency arbitrage, such as day traders. We do not implicate
them in our shorthand.
7
Here’s how they work. All orders going to IEX must
traverse the speedbump before reaching IEX. That whole trip
takes about 350 microseconds (about 1/11th the blink of an
eye).2 But communications coming from other exchanges to
IEX bypass the speedbump. Those communications include
updates to the prices of securities on those exchanges. The
upshot is that IEX gets information from other exchanges about
imminent changes to the national best bid or offer for securities
a bit before it receives orders from traders.
The information from other exchanges then goes into the
crumbling quote indicator’s algorithm to determine whether
the national best bid or offer for a particular security is about
to change. If the algorithm says that the national best bid or
offer for a security is about to change, then the crumbling quote
indicator “turns on” for that security for two milliseconds.3
When that happens, for the order type at issue in this case,
IEX then updates the security’s price to reflect the changing
national best bid or offer. And the update happens while
incoming orders from liquidity takers, including short-term
investors, are stuck in the speedbump. Usually that update
makes buy orders go down a penny and sell orders go up a
penny.
If IEX’s strategy works as intended, orders protected by it
are less likely to fall prey to latency arbitrage. When the short-
term investor’s order reaches IEX, the order will not execute if
the new market price is too low or too high to satisfy a short-
term investor who is only interested in taking when providers’
bids and offers are stale.
2
There are 1,000,000 microseconds in a second.
3
There are 1,000 milliseconds in a second.
8
E
For several years, IEX applied the speedbump and
crumbling quote indicator only to certain non-displayed orders.
But then, in 2019, IEX submitted a proposed rule change to the
SEC asking to add a new “Discretionary Limit” order type that
is (1) displayed and (2) subject to IEX’s anti-latency-arbitrage
regime described above. Investors Exchange LLC; Notice of
Filing of Proposed Rule Change to Add a New Discretionary
Limit Order Type, Exchange Act Release No. 34-87814, 84
Fed. Reg. 71,997 (Dec. 30, 2019).
The SEC took comments on the proposed D-Limit order
for several months and ultimately approved it. Investors
Exchange LLC; Order Approving a Proposed Rule Change to
Add a New Discretionary Limit Order Type Called D-Limit,
Exchange Act Release No. 34-89686, 85 Fed. Reg. 54,438(Sept. 1, 2020). Citadel Securities, a high-frequency trader and
objecting commenter, now petitions for review.
At issue is not whether companies like Citadel may seek
advantages in the market by using advanced technology and
ingenious trading strategies. No one in this case has alleged
that latency arbitrage is unlawful. The issue, instead, is
whether the SEC may allow IEX to innovate, with the D-Limit
order, in a way that offers new opportunities to long-term
investors.
II
We review the SEC’s order according to the
Administrative Procedure Act’s “arbitrary and capricious
standard.” Laccetti v. SEC, 885 F.3d 724, 725 (D.C. Cir.
2018); see also 5 U.S.C. § 706(2)(A). That standard requires
9
that the SEC’s “action be reasonable and reasonably
explained.” Laccetti, 885 F.3d at 725. The SEC’s
“determinations based upon highly complex and technical
matters are entitled to great deference.” Domestic Securities,
Inc. v. SEC, 333 F.3d 239, 248 (D.C. Cir. 2003) (quoting
Appalachian Power Co. v. EPA, 251 F.3d 1026, 1035 (D.C.
Cir. 2001)). And its factual findings are conclusive if
supported by substantial evidence. 15 U.S.C. § 78y(a)(4).
Citadel argues that the SEC lacked substantial evidence for
one of its findings and that three of the SEC’s decisions were
arbitrary and capricious.
We disagree.
A
The Securities Exchange Act of 1934 states that an
exchange’s rules may not be “designed to permit unfair
discrimination” or impose an undue burden on competition. 15
U.S.C. § 78f(b)(5), (8).
The SEC determined that because the D-Limit order
benefits “all market participants” by “narrowly” targeting
latency arbitrage, it does not unfairly discriminate against
liquidity takers or unduly burden competition. Order
Approving D-Limit, 85 Fed. Reg. at 54,451.
Citadel’s first two claims concern that determination.
According to Citadel, (1) the SEC lacked substantial evidence
to find that the crumbling quote indicator accurately identifies
latency arbitrage rather than normal trading activity, and (2)
even if the crumbling quote indicator does identify latency
arbitrage, the SEC’s conclusion that the D-Limit order
narrowly targets latency arbitrage was arbitrary and capricious.
10
Neither claim succeeds.
To start, substantial evidence supports the SEC’s finding
that the crumbling quote indicator accurately identifies latency
arbitrage. The crumbling quote indicator turns on for a given
security for an average 0.007% of the trading day (about 1.64
seconds). Id. at 54,440. But in that “very short” time, 24% of
IEX’s displayed liquidity is traded. Id. at 54,440 n.36. That
disparity — 24% of displayed liquidity trading in 0.007% of
the day — is substantial evidence that short-term investors
engage in latency arbitrage during the same “small increments
of time” that the crumbling quote indicator turns on. Id. at
54,442.4
That substantial evidence also resolves Citadel’s arbitrary-
and-capricious claim. The SEC determined that, by definition,
the D-Limit order narrowly targets latency arbitrage because
IEX changes a price only when the crumbling quote indicator
turns on. Id. at 54,449. Considering the “great deference” that
we afford the SEC when making such “determinations based
upon highly complex and technical matters,” we see nothing
unreasonable about the SEC’s conclusion. Domestic
Securities, Inc., 333 F.3d at 248 (quoting Appalachian Power
Co., 251 F.3d at 1035).
Citadel’s five counter-arguments do not convince us
otherwise.
4
Additional data from IEX similarly showed that the crumbling
quote indicator “was on between 0.026% (for January 2020) and
0.125% (for March 2020) of the time during regular market hours
and the percent of displayed volume that traded when the [Indicator]
was on during that period ranged between 22% (for March 2020) to
24.4% (for January 2020).” Id. at 54,448 (cleaned up).
11
First, Citadel says that the correlation between the
crumbling quote indicator turning on and substantial trading
activity just shows flurries of trading, not latency arbitrage. It
points out that normal trading activity often happens through
large market sweeps (orders taking a security off all exchanges)
that could turn on the crumbling quote indicator. See JA 372.
But trading during the two-millisecond moments that the
crumbling quote indicator is on requires either incredible
chance or incredible technological advantages that permit
timing orders down to the microsecond. The SEC reasonably
concluded that the latter explanation is correct — the
crumbling quote indicator is unlikely to affect normal trading
activity during the “small part of the day” that it is on because,
as “dozens of commenters” stated, only a small set of high-
frequency traders have the technological ability to target those
precise moments. Order Approving D-Limit, 85 Fed. Reg. at
54,446. And to the extent that traders worry that a large market
sweep might trigger the crumbling quote indicator, the SEC
stated that those traders “can, and generally do, account for this
fact” by sending orders to IEX a hair sooner than they send
orders to other exchanges so that the orders hit all the
exchanges in the same instant and avoid triggering the
crumbling quote indicator. Id. at 54,441.5
5
Citadel asserts that the SEC didn’t support its conclusion that such
routing practices are “commonplace.” Id. But the SEC pointed out
that accounting for the speedbump is no different than accounting for
other geographical distances between exchanges, and it relied on
commenters’ statements that accounting for such differences is
common and feasible. Id. Further, no commenter stated that it could
not use such routing strategies. And sending orders so that they
arrive at IEX at the same moment that they arrive at other exchanges
would not “preference” IEX as Citadel contends because the orders
would not reach IEX first; they would arrive at the same time that
they arrive at other exchanges. Id.
12
Second, Citadel argues that the crumbling quote indicator
fails to accurately identify latency arbitrage because it catches
the orders that Citadel makes “on behalf of retail investors”
who ask Citadel to trade securities for them. Id. at 54,440 n.38.
But the SEC pointed out that Citadel does not directly route a
retail “customer’s order to exchanges, but rather is, for
example, buying shares for its own account and selling shares
to the customer.” Id. That means Citadel still controls the
timing and routing methods of those orders. And that in turn
allows those orders to employ latency arbitrage tactics as much
as any other orders.
Third, Citadel asserts that IEX misclassified it as a
“proprietary” trading firm, which is a firm with an incentive to
use high-frequency trading technology, and that the SEC
improperly relied on that misclassification to determine that the
crumbling quote indicator identifies latency arbitrage.
But even if Citadel is right about its misclassification, the
misclassification was not essential to the SEC’s decision. The
already-discussed evidence was sufficient to support the SEC’s
conclusions, and the SEC noted that IEX produced data that
excluded trades from Citadel but still equally exhibited the D-
Limit order’s narrow tailoring. See id. We thus need not
address this dispute. See Indiana Municipal Power Agency v.
FERC, 56 F.3d 247, 256 (D.C. Cir. 1995) (“we will sustain an
agency decision resting on several independent grounds if any
of those grounds validly supports the result, unless there is
reason to believe the combined force of the otherwise
independent grounds influenced the outcome” (cleaned up)).
Fourth, Citadel tries to analogize this case to Susquehanna
International Group, LLP v. SEC, which held that an SEC
order was arbitrary and capricious because of its
“unquestioning” reliance on the conclusions of the regulated
13
party. 866 F.3d 442, 448 (D.C. Cir. 2017). The SEC, however,
did no such thing here. IEX and many commenters provided
ample data showing the D-Limit order’s effect. The SEC then
took that data, analyzed it for itself, and reasonably concluded
that the D-Limit order benefits “all market participants” by
thwarting latency arbitrage. Order Approving D-Limit, 85 Fed.
Reg. at 54,444.
Fifth and finally, Citadel argues that the SEC “ignored” the
possibility that other exchanges will adopt D-Limit orders. The
SEC explained, though, that “[t]o the extent that another
exchange seeks to adopt its own . . . D-Limit order type, the
Commission would . . . consider whether the new proposal is
narrowly tailored to achieve its stated objectives and consistent
with the Exchange Act and the rules and regulations
thereunder.” Id. at 54,446 n.114. That explanation is adequate
because the SEC has “no obligation to hypothesize about future
regulations.” Taxpayers of Michigan Against Casinos v.
Norton, 433 F.3d 852, 864 (D.C. Cir. 2006).
For all those reasons, the SEC’s determination that the D-
Limit order does not violate the Exchange Act by unfairly
discriminating or unduly burdening competition was
reasonable and supported by substantial evidence.
B
Before the proceedings in this case, the SEC rejected a
proposal by Cboe EDGA Exchange, Inc., which had sought to
impose an all-day, four-millisecond delay on incoming
communications from liquidity takers, but not to similarly
delay incoming messages from liquidity providers. That would
have given liquidity providers a window to update their bids
and offers while liquidity takers’ orders were still traversing
Cboe’s speedbump. In this case, commenters suggested to the
14
SEC that its rejection of Cboe’s proposal should govern its
decision on IEX’s D-Limit order proposal. The SEC, however,
concluded that its past rejection of Cboe’s proposal did not
control its decision on IEX’s D-Limit order because the two
proposals differed substantially. Order Approving D-Limit, 85
Fed. Reg. at 54,450.
We have held that “when departing from precedents or
practices, an agency must offer a reason to distinguish them or
explain its apparent rejection of their approach.” Physicians
for Social Responsibility v. Wheeler, 956 F.3d 634, 644 (D.C.
Cir. 2020) (cleaned up).
That’s what happened here. The SEC distinguished its
Cboe decision by explaining that Cboe had not produced
evidence of latency arbitrage on its exchange. Order
Approving D-Limit, 85 Fed. Reg. at 54,450. In contrast, IEX
produced that evidence. As set forth above, 24% of displayed
liquidity on IEX trades in 0.007% of the trading day. Id. at
54,440 n.36.
Further, the SEC noted that Cboe’s proposed delay (1) was
four milliseconds long; (2) applied asymmetrically to liquidity
providers and takers; and (3) allowed liquidity providers to
manually reprice their bids and offers during the entire trading
day. Id. at 54,449-50. IEX’s delay, by contrast, (1) is 350
microseconds long, which is approximately 1/11th the length
of Cboe’s delay; (2) applies to incoming communications from
both liquidity providers and takers; and (3) permits D-Limit
orders to automatically reprice, which occurs during just
0.007% of the trading day. Id. at 54,438, 54,440.6
6
Citadel says that IEX’s proposal itself applies asymmetrically to
liquidity providers and takers. But even if Citadel is correct, the
15
Those differences show that IEX’s delay targets latency
arbitrage more narrowly than did Cboe’s proposal. And it was
reasonable for the SEC to conclude that the differences show
that IEX’s proposal does not unfairly discriminate in the way
that Cboe’s did. Instead, IEX’s proposal benefits “all market
participants.” Id. at 54,449.7
The SEC thus did not arbitrarily change course from its
Cboe decision.
C
As stated, for a bid or offer to qualify as a protected
quotation under Regulation NMS, it must be “automated.” 17
C.F.R. § 242.600(b)(70). And to be automated, it must execute
“[i]mmediately and automatically.” Id. § 242.600(b)(6).
other differences between IEX’s and Cboe’s proposals are enough to
distinguish them from each other.
7
Citadel says that the SEC has contradicted its statement in the Cboe
decision that “a market participant’s ability to . . . alter its trading
strategies in response to” a proposed speedbump “does not, by itself,
demonstrate that the proposal would not permit unfair
discrimination.” Cboe EDGA Exchange, Inc.; Order Disapproving
Proposed Rule Change to Introduce a Liquidity Provider Protection
Delay Mechanism on EDGA, Exchange Act. Release No. 34-88261,
85 Fed. Reg. 11426, 11,435 (Feb. 27, 2020). Here, though, the SEC
did not determine that traders’ abilities to route orders so as not to
turn on IEX’s crumbling quote indicator was “by itself” sufficient to
assuage discrimination concerns. Traders’ abilities to use smart
routing strategies was just one factor, along with the SEC’s
determination that the crumbling quote indicator narrowly targets
latency arbitrage.
16
The SEC determined that D-Limit orders can qualify as
protected quotations because they execute immediately and
automatically. Order Approving D-Limit, 85 Fed. Reg. at
54,447. Citadel argues that this conclusion was arbitrary and
capricious.
We again disagree.
To begin, the SEC concluded that every part of a D-Limit
order’s operation is automatic, and Citadel offers no serious
reason to question the reasonableness of that conclusion. IEX’s
process involves no manual discretion. Instead, during the
0.007% of the day that the crumbling quote indicator is on, D-
Limit orders re-price according to a publicly available formula
and then execute if able. Id. at 54,445.
Citadel’s immediacy argument is more plausible but
ultimately unpersuasive. In 2016, the SEC interpreted
Regulation NMS’s immediacy requirement to allow for “an
intentional access delay that is de minimis — i.e., a delay so
short as to not frustrate the purposes of Rule 611 by impairing
fair and efficient access to an exchange’s quotations.”
Commission Interpretation Regarding Automated Quotations
Under Regulation NMS, Exchange Act Release No. 34-78102,
81 Fed. Reg. 40,785, 40,792 (June 23, 2016). The SEC then
applied that interpretation here to determine that the D-Limit
order executes immediately. Order Approving D-Limit, 85
Fed. Reg. at 54,447.
In both normal and legal parlance, the word “immediate”
means “[o]ccurring without delay.” Immediate, Black’s Law
Dictionary (8th ed. 2004). But as the SEC reasonably found,
an order can be executed “immediately” even if it is subject to
a de minimis delay. Cf. Wisconsin Department of Revenue v.
William Wrigley, Jr., Co., 505 U.S. 214, 231 (1992) (“the
17
venerable maxim de minimis non curat lex (‘the law cares not
for trifles’) is part of the established background of legal
principles against which all enactments are adopted, and which
all enactments (absent contrary indication) are deemed to
accept”). Something is “de minimis” if it is “[t]rifling” or “so
insignificant that a court may overlook it in deciding an issue
or case.” De minimis, Black’s Law Dictionary (8th ed. 2004).
To spin off an example put forth by Citadel’s counsel at oral
argument, imagine a mother tells her daughter, Annie, to clean
her room “immediately.” If Annie picks up a book and reads
it before cleaning her room, then she disobeys her mother’s
command. But if Annie instead just blinks her eyes once more
than necessary before starting to clean, she does not violate that
command because her delay is de minimis. The SEC’s
conclusion that mere de minimis delays do not cause an order
to violate Regulation NMS’s immediacy requirement was
therefore reasonable.
Now, what’s trifling or insignificant in one context might
be major in another, especially when talking about something
like a delay. For instance, a one-second delay during a cruise
across the Atlantic may be de minimis, but a one-second delay
during a 100-yard dash is enormous. Compare 16 U.S.C.
§ 1854(a)(5) (“For purposes of this subsection and subsection
(b), the term ‘immediately’ means on or before the 5th day after
the day on which a Council transmits to the Secretary a fishery
management plan”), with 7 C.F.R. § 65.180 (“Imported for
immediate slaughter means . . . consignment directly from the
port of entry to a recognized slaughtering establishment and
slaughtered within 2 weeks from the date of entry.”).
In approving IEX’s D-Limit order type — displayed
orders subject to the speedbump and the crumbling quote
indicator — the SEC reasonably applied its established
interpretation of Regulation NMS. It found that D-Limit orders
18
execute “immediately” because they are subject to only a de
minimis delay that does “not frustrate the purposes of Rule 611
by impairing fair and efficient access to IEX’s quotation[s].”
Order Approving D-Limit, 85 Fed. Reg. at 54,441, 54,447.
Given the record before us, we see no reason to disrupt the
SEC’s decision.
Consider first the length of the delay: a mere 350
microseconds — or approximately eleven times as fast as
Annie’s blink. Consider next that a D-Limit order’s delay is
similar to the delay that traders’ communications already
experience when traveling between various other exchanges
across the country. In essence, IEX just operates as though it’s
thirty-eight miles farther from the traders than it actually is. Id.
at 54,441. Finally, as the SEC pointed out, IEX “is not
introducing any new delay or modifying its speed bump in
connection with D-Limit orders.” Id. at 54,447. D-Limit
orders will take no longer to execute than other orders that
execute “immediately” on IEX despite having to traverse the
speedbump, which predates the advent of IEX’s D-Limit order.
Taking those considerations together, we conclude that the
SEC’s determination that the D-limit orders are subject to
nothing more than a de minimis delay was not arbitrary and
capricious.
In response, Citadel makes three points.
First, Citadel argues that even if D-Limit orders should
ultimately qualify as protected quotations, the SEC failed to
adequately explain its decision. We agree that the SEC was
curt with its explanation in a section labeled “Automated
Quotes and Rule 611.” Id. But that section refers to Section
III.A of the same order, in which the SEC fully explained that
D-Limit orders execute immediately and automatically. The
SEC also pointed back to the SEC’s 2016 interpretive rule,
19
permitting exchanges to impose a de minimis delay on
incoming communications. Because of those cross references,
the SEC adequately explained its decision.
Second, Citadel argues that because the delay that IEX
imposes on D-Limit orders is intentional, D-Limit orders do
not execute immediately, no matter how small the delay is. But
“immediately” describes a matter of time, not intent. An
exchange without any intent to delay orders could nonetheless
fail to offer immediate order execution through something like
inadvertent computer glitches. (Likewise, Annie could get sick
and fail to immediately clean her room; no matter how
excusable or unintentional that delay may have been, she didn’t
clean the room immediately.) And on the flip side, an exchange
with every intent of delaying communications to its exchange
still offers immediate execution if the delay it imposes is so
small that it fails to impede fair and efficient market access
(much like Annie’s eye blink did not delay her cleaning, no
matter how intentional the blink may have been).
Third, Citadel argues that the delay for the D-Limit is not
de minimis because it has a substantial effect on the market
— it thwarts 24% of trades for displayed liquidity (as the SEC
stated over and over again). But those affected trades aren’t a
normal part of the market. The SEC reasonably determined
that those trades, by and large, involve latency arbitrage tactics
that actually harm the market. Order Approving D-Limit, 85
Fed. Reg. at 54,451. Under that view, they are less like an
actual trade than a surcharge imposed on market participants
by short-term investors. So regardless of how many trades the
D-Limit order may affect, the SEC still reasonably concluded
that it will not hinder fair and efficient market access. Instead,
it will help the market by combating latency arbitrage.
20
* * *
Because substantial evidence supported the SEC’s
findings and because the SEC’s conclusions were reasonable
and reasonably explained, we deny Citadel’s petition for
review.
So ordered.