OMAHA (CN) - TD Ameritrade violated promises to its customers and made $236 million last year from sending customers' trades to whichever exchange paid it the most kickbacks for the orders, a class action claims in court.
Lead plaintiff Jay Zola sued TD Ameritrade and TD Ameritrade Clearing, on Thursday in Douglas County Court.
In its uniform agreement with clients, TD Ameritrade "promises to 'consider a wide variety of factors in determining where to direct [client] orders, such as execution price, opportunities for price improvement (which is when an order is executed at a price that is more favorable than the displayed national best bid or offer), market depth, order size and trading characteristics of the security, efficient and reliable order handling systems and market center service levels, speed, efficiency, accuracy of executions, and the cost of executing orders at a market,'" the lawsuit states. (Brackets and parentheses in complaint.)
But that's not what happens, Zola says: "TD Ameritrade neither 'consider[s] a wide variety of factors' in order-routing nor routes its orders in the manner that is best for its customers. Rather, as one of its own executives admitted in testimony before the United States Senate, TD Ameritrade routes 'virtually all' of its orders based on a single factor: what's best for TD Ameritrade. That is, the TD Ameritrade executive admitted (and the data confirms) that TD Ameritrade has been routing virtually all of its customers' orders through whichever order internalizer or exchange is willing to pay TD Ameritrade the most money to receive its order flow. In turn, those order internalizers and exchanges expose TD Ameritrade's customers to toxic trading.
"TD Ameritrade calls the kickbacks that it receives from order internalizers and exchanges 'payment for order flow.' In 2013, the company earned $236 million from this practice."
In a footnote, the complaint states: "Order internalizers are market makers who match some orders internally (either for their own book or for other market participants) before directing orders to public exchanges. As set forth in greater detail below, the primary order internalizers to whom TD Ameritrade directs its order flow are Citadel Execution Services and Citi Global Markets, a subsidiary of Citigroup."
The lawsuit begins with a quotation from Michael Lewis's book "Flash Boys," which alerted the world to the practices of high-frequency traders.
Zola seeks class certification, disgorgement of unjust profits, costs and damages for brief of contract. He is represented by Matthew Lathrop of Omaha, and Block & Leviton of Boston, Mass.