Brokerage Firms in Mismarking Case Didn't Exhaust Remedies

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By Cameron Finch

Dec. 14 — Citadel Securities LLC and several other securities firms operating as market makers lost their bid Dec. 11 to proceed against national securities exchanges that allegedly mischarged payment for order flow fees on millions of stock option orders.

Citadel didn't exhaust administrative remedies to warrant federal review, the U.S. Court of Appeals for the Seventh Circuit affirmed. In concluding that the Securities and Exchange Commission should have reviewed the controversy, it said Citadel can't show that PFOF fees are outside of the defendants' regulatory functions or that “the SEC's administrative procedure is futile or inadequate to prevent irreparable injury.”

Mischarged PFOF Fees

Citadel alleged that the Chicago Board Options Exchange and several other national securities exchanges mischarged PFOF fees on millions of “house trades” not subject to those fees between January 2004 and June 2011. A PFOF is an agreement in which a market maker pays a broker fees in return for sending it orders. According to the plaintiffs, a unidentified broker-dealer, who isn't a party to the suit, incorrectly marked stock option orders, resulting in the payment of the fees.

In July 2013, Citadel sued CBOE for repayment of the mischarged fees in Illinois state court. CBOE then removed the case to federal district court (165 SLD, 8/26/13). The U.S. District Court for the Northern District of Illinois dismissed the case for lack of subject matter jurisdiction and denied Citadel's motion to send the case back to state court.

Citadel and the other plaintiffs are represented by Ellen Wheeler, Foley & Lardner LLP, Chicago. CBOE is represented by Paul Edwin Greenwalt III and Paul E. Dengel, Schiff Hardin LLP, Chicago. Nasdaq OMX PHLX is represented by Terrence Patrick Canade, Locke Lord LLP, Chicago and Douglas R. Cox, Gibson, Dunn & Crutcher LLP, Washington. NYSE Arca Inc., NYSE MKT LLC and International Securities Exchange LLC are represented by Douglas W. Henkin, Milbank, Tweed, Hadley & McCloy, New York.

By Cameron Finch

To contact the reporter on this story: Cameron Finch in Washington at

To contact the editor responsible for this story: Phyllis Diamond at