In October 2020, the Charles Schwab Corporation merged with TD Ameritrade. This antitrust class action alleges that the resulting brokerage company “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” and “has substantially decreased competition[.]” But retail investors have also made less money, the complaint alleges, among other things because it profits by selling their order flow to market makers, “who then trade against them for profit.”
The Retail Brokerage Client Class is all persons, entities, or corporation in the US who bought or sold equities or equity options through TD Ameritrade, Schwab, or any of their affiliates between October 26, 2020 and the present.
Early in the 1980s, Charles Schwab began to cater to individual smaller investors, known as retail investors, offering them lower commissions on trades. But when the market crashed late in that decade, retail investors were scared away.
The complaint attributes to Bernie Madoff an idea for market makers to profit from retail investors: “Madoff’s idea was to pay discount and retail brokers to send their customers’ orders to market makers, who could then trade against those orders for profit. This meant that instead of routing retail investor orders to the exchanges, retail brokers would route them to market makers that paid for the privilege, but then profited by placing trades against the bid-ask spread.”
The complaint traces the development of the retail trading market, leading eventually to machine learning and AI systems, which used data to direct market makers’ trades. The complaint alleges that “the most valuable data imaginable was that of so-called ‘dumb money’—the actions of retail investors that trading firms’ models could learn to trade against for profit.” Market-maker firms then multiplied the amount they were willing to pay for retail market flow from brokerages like Schwab and TD Ameritrade, the complaint claims.
Eventually, this led to the abolition of commissions entirely and the reliance of brokerages on income from order flow, leading to the creation of the retail order flow market (ROFM), the complaint alleges: “Retail investors produced order flow, retail brokers acquired it from investors for execution services and remittances, and market makers acquired it from brokers for billions of dollars in cash and other inducements.”
This led to a conflict of interest, but the complaint alleges that two competitive factors held it down: competition among brokerages for retail investors’ trades and competition among market makers for order flow.
But the merger of Schwab and TD Ameritrade effectively ended that competition, the complaint claims, because the combined entity held half the payments for order flow in the ROFM and retail investors had less choice of companies for their brokerage needs.
Article Type: LawsuitTopic: Antitrust
Most Recent Case Event
Charles Schwab, TD Ameritrade Merger Antitrust Complaint
June 2, 2022
In October 2020, the Charles Schwab Corporation merged with TD Ameritrade. This antitrust class action alleges that the resulting brokerage company “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” and “has substantially decreased competition[.]” But retail investors have also made less money, the complaint alleges, among other things because it profits by selling their order flow to market makers, “who then trade against them for profit.”
Charles Schwab, TD Ameritrade Merger Antitrust ComplaintCase Event History
Charles Schwab, TD Ameritrade Merger Antitrust Complaint
June 2, 2022
In October 2020, the Charles Schwab Corporation merged with TD Ameritrade. This antitrust class action alleges that the resulting brokerage company “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” and “has substantially decreased competition[.]” But retail investors have also made less money, the complaint alleges, among other things because it profits by selling their order flow to market makers, “who then trade against them for profit.”
Charles Schwab, TD Ameritrade Merger Antitrust Complaint