[00:00:00] Speaker 02: Case number 20-1424, Citadel Securities LLC petitioner versus Securities and Exchange Commission. [00:00:07] Speaker 02: Mr. Wall for the petitioner, Ms. [00:00:09] Speaker 02: Marisi for the respondent, Ms. [00:00:11] Speaker 02: Stetson for the intervener for the respondent. [00:00:16] Speaker 06: Good morning, Mr. Wall, whenever you're ready. [00:00:19] Speaker 01: Good morning, Your Honors, and may it please the Court. [00:00:22] Speaker 01: The SEC has allowed a small for-profit exchange to interfere directly in the market in order to attract one side of that market and boost its revenues. [00:00:31] Speaker 01: In approving that change, the Commission committed three errors that independently require reversal. [00:00:36] Speaker 01: First, the Commission seriously misunderstood the data before it. [00:00:40] Speaker 01: Rather than look at particular trades, the commission relied on misleading statistics that show a lot of trading when the signal is on. [00:00:47] Speaker 01: Those statistics reflect normal trading activity, not phantom arbitrage. [00:00:52] Speaker 01: Large orders across multiple exchanges cause prices to move, which turns on the signal. [00:00:59] Speaker 01: Even after Citadel submitted data showing exactly that at joint appendix 372, the commission never addressed it. [00:01:06] Speaker 03: Second, even as [00:01:07] Speaker 03: Mr. Well, you just referred to phantom arbitrage. [00:01:10] Speaker 03: Do you do you think latency arbitrage exists? [00:01:15] Speaker 01: Judge Walker, I don't think the court has to get into it. [00:01:18] Speaker 03: All the court needs say is that if it exists, the data here doesn't show it well, but part of the argument is whether or not the algorithm and the speed bump and. [00:01:29] Speaker 03: You know, all of the things that IEX have done here is sufficiently tailored enough to reduce latency arbitrage. [00:01:38] Speaker 03: And I couldn't tell from your brief whether your client acknowledges its existence even. [00:01:46] Speaker 03: And if you don't acknowledge its existence, it's hard to know how you can make an argument that the algorithm and the speed bump are not sufficiently tailored. [00:01:54] Speaker 01: Judge Walker, I think there's good reason to be extremely skeptical. [00:01:57] Speaker 01: 10, 12 years ago, sure, maybe. [00:02:00] Speaker 01: Now, no. [00:02:02] Speaker 01: Look, there are a lot of dogs that ought to be barking if this is the phenomenon that they say it is. [00:02:08] Speaker 01: The SEC has all the trading data in its MITA system and IEX has access to the trades too. [00:02:13] Speaker 01: You'd think that somebody would be analyzing the actual trades to give you examples of latency arbitrage. [00:02:19] Speaker 01: Or you'd at least have firsthand accounts of people who were saying that particular cables were shorter, or here are the firms that have the better data speeds. [00:02:26] Speaker 01: In fact, the Amici in this case, like XDX on the other side, which is one of Citadel's competitors. [00:02:31] Speaker 01: has the same connectivity and data. [00:02:33] Speaker 01: I doubt Ms. [00:02:33] Speaker 01: Parisi or Ms. [00:02:34] Speaker 01: Stetson will tell you that they have any competitive advantage or disadvantage vis-a-vis Citadel. [00:02:39] Speaker 01: So I think there are good reasons to be skeptical, Judge Walker, about whether this narrative in this day and age is true. [00:02:45] Speaker 01: But again, I don't need the court to agree with me on that. [00:02:48] Speaker 01: All the court needs to say is, look, they took there to be a problem because they took these numbers and said there's a lot of trading when the signal is on. [00:02:55] Speaker 01: And the numbers are meaningless because it's large trades that are turning on the signal. [00:03:01] Speaker 01: And that's the example that we gave at page 372 of the joint appendix. [00:03:04] Speaker 01: If you look, we supplied an actual trade to IEX and the commission and said, we sent out a large buy order across multiple exchanges because we were sweeping the market. [00:03:14] Speaker 01: We wanted a lot of shares of this particular stock. [00:03:17] Speaker 01: And IEX, because of the speed bump, looked at what was happening on all the other exchanges, correctly predicted that because there was a spike in demand, prices were going to move. [00:03:27] Speaker 01: It turned on the signal. [00:03:28] Speaker 01: and then you can't execute the last little piece in IEX. [00:03:31] Speaker 03: And the key- Mr. Walker. [00:03:33] Speaker 03: Oh, you can finish your sentence, please. [00:03:35] Speaker 01: Oh, I was just going to say, Judge Walker, the key thing to understand is that IEX is a bit player. [00:03:38] Speaker 01: It only has about 2% market share. [00:03:40] Speaker 01: It doesn't have a lot of liquidity. [00:03:42] Speaker 01: There's, so to speak, there's not a lot of stuff sitting on its shelves. [00:03:44] Speaker 01: So if you're going, you're often going because you need a lot of something, including the last little piece at a place like IEX. [00:03:52] Speaker 01: And it's that last little piece that's making the signal turn on. [00:03:55] Speaker 01: It's got nothing to do with latency arbitrage. [00:03:57] Speaker 03: Let me ask, IEX says in its brief that you carefully avoided telling the commission and this court two things. [00:04:05] Speaker 03: And so I wanted to give you the opportunity to answer them if you want to or to confirm that Citadel would rather not. [00:04:14] Speaker 03: The first is this, Citadel carefully avoided telling the commission and this court how much of its trading activity when the indicator is on, is on behalf of retail investors. [00:04:26] Speaker 03: So not true. [00:04:27] Speaker 03: As we explain how much of your trading activity is on behalf of retail investors when the indicator is on. [00:04:37] Speaker 01: So we looked at one month of data. [00:04:40] Speaker 01: And as we told them at page 313 of the joint appendix, we said more than 50% of the trades we sent you in one month. [00:04:47] Speaker 01: It's actually 56% were retail rather than proprietary. [00:04:51] Speaker 01: And of those Judge Walker, we said 15% turned on the signal because they were sufficiently large. [00:04:58] Speaker 01: It was the size of the order that was driving this. [00:05:00] Speaker 01: It had nothing to do with latency arbitrage. [00:05:03] Speaker 01: In response to that, here's what the commission did. [00:05:06] Speaker 01: It said, OK, you say we mislabeled you as proprietary when, in fact, you do retail. [00:05:11] Speaker 01: We're just going to exclude your data from the analysis. [00:05:13] Speaker 03: I caught that. [00:05:14] Speaker 03: I remember that part. [00:05:14] Speaker 03: Let me ask the second thing that they say you avoided telling the commission on the court. [00:05:18] Speaker 03: They say you did not say whether retail investors, as opposed to Citadel, benefit from routing retail orders at the moments the indicator is on. [00:05:31] Speaker 01: So, not true judge Walker but it's the flip side as we explained to the commission, the retail investor is harmed. [00:05:37] Speaker 01: We're not bundling these retail orders there's some anonymous comment letter it provides no support for that. [00:05:43] Speaker 01: We told the commission it wasn't true and it's not true. [00:05:47] Speaker 01: Maybe we fill it internally if we have the volume or we send it out to the exchange. [00:05:53] Speaker 01: We send it out quickly, we send it out promptly and we do it across all the exchanges if it's a large order. [00:05:58] Speaker 01: Again, we gave an example at page 372 of the joint appendix. [00:06:02] Speaker 01: And what happens is, let me give you a really simple example just to make it concrete. [00:06:06] Speaker 01: Let's say you want a thousand shares of Apple. [00:06:09] Speaker 01: There's 500 on the New York Stock Exchange, there's 400 on NASDAQ and there's a hundred at IEX, right? [00:06:15] Speaker 01: You hit the New York Stock Exchange and NASDAQ, you get your 900 shares. [00:06:19] Speaker 01: IEX sees that going on. [00:06:20] Speaker 01: It correctly predicts that because of the spike in the demand, the price is gonna move. [00:06:25] Speaker 01: It ticks up a cent. [00:06:26] Speaker 01: So for those last 100 shares, that retail investor, you, you wanted the thousand shares, your mutual fund, or you're investing on behalf of ordinary folks, you pay an extra dollar. [00:06:37] Speaker 01: Their only answer to that is not to look at the retail costs. [00:06:39] Speaker 01: They never considered that at all. [00:06:41] Speaker 01: All they say in the order and then in their brief is, well, you can just reroute. [00:06:45] Speaker 01: But the problem, Judge Walker, is now you jump from the frying pan into the fire. [00:06:49] Speaker 01: If you executed IEX first for the 100 shares, it's true. [00:06:52] Speaker 01: You don't pay the extra dollar. [00:06:54] Speaker 01: But you hold back the other two orders for the 900 shares. [00:06:58] Speaker 01: And as we told the commission, by the time you send them out, the shares may not be there or they may not be there at that price. [00:07:04] Speaker 01: So you're sort of damned if you do, even more damned if you don't. [00:07:08] Speaker 01: And if the commission had looked at all of this in some reasoned order and said, here are the benefits and the costs, I'd granted be a tougher case. [00:07:15] Speaker 01: But essentially, they haven't looked at any of it. [00:07:17] Speaker 01: They say at page 41 of their brief, you can just reroute. [00:07:20] Speaker 01: We come back and say, well, you said in response to the CBOE proposal that routing wasn't enough. [00:07:25] Speaker 01: And then they drop this footnote at page 55 to say, well, you're not going to need any material changes in routing. [00:07:30] Speaker 01: The brief is totally schizophrenic on it. [00:07:33] Speaker 01: You will need to reroute. [00:07:34] Speaker 01: That rerouting has costs. [00:07:36] Speaker 01: And the commission didn't consider those costs. [00:07:39] Speaker 06: Mr. Ball, is your argument that the S, I mean, are you making an argument that the SEC lacks the authority to counteract latency arbitrage? [00:07:49] Speaker 06: So if they had provided more reasoning or more data that they could attack this problem, or is your argument that they just simply don't have the authority under their statute? [00:08:02] Speaker 01: No, only on the second of the protected quote side. [00:08:06] Speaker 01: They can't do what they're doing. [00:08:07] Speaker 01: They can't protect the quotes because it's not consistent with the language of the regulation. [00:08:11] Speaker 01: But on the first of the two issues, the delimit argument, no, Judge Rao, if they had come in and presented actual evidence of latency arbitrage, they presented actual trades or even firsthand accounts from people who were writing the algorithms involved. [00:08:25] Speaker 01: they had some reason to base us, and then if they had shown, look, we've isolated out the retail, we've isolated out the ISOs, the inner market sweeps, we're still showing that we're actually picking up the arbitrage. [00:08:37] Speaker 01: We know that's going to impose some cost on retail investors on the liquidity taker side of the market, but here's why we think those costs are overbalanced by benefits. [00:08:46] Speaker 01: I mean if they've done what you would expect in a well reason to commission order, I think it's possible they could have done this, but this is just a sloppy order. [00:08:55] Speaker 01: It takes data, it misreads the stats, it assumes away all the costs. [00:08:59] Speaker 01: If you look at both the order and their brief to this court it reads like it's all roses and no thorns. [00:09:04] Speaker 01: It doesn't have any consideration of the costs on retail or routing. [00:09:07] Speaker 01: And then just to finish up where I started Judge Rao, at a minimum, and this was the third error I was gonna get to in my opening, they can't protect the quotes. [00:09:16] Speaker 01: The regulation says immediately and automatically executable. [00:09:20] Speaker 01: And the whole point of this is they're slowing it down so that it's not immediate. [00:09:24] Speaker 01: And then instead of automatically executing, they're automatically repricing. [00:09:29] Speaker 01: They're doing the exact opposite of what the regulation says. [00:09:32] Speaker 01: And so, no, on that side of it, they can't do this absent another notice and comment rulemaking. [00:09:38] Speaker 06: So, Mr. Long, the question of immediately, you know, the commission claims that it should get Kaiser deference for its interpretation of immediately. [00:09:47] Speaker 06: And it made that interpretation in 2016 when they did the when they did the initial IEX order. [00:09:54] Speaker 06: So so why shouldn't they get Kaiser deference in this context? [00:09:59] Speaker 01: So I say two things to address. [00:10:00] Speaker 01: First is, [00:10:01] Speaker 01: You don't get our if the language is unambiguous. [00:10:04] Speaker 01: And there's only, I mean, the natural meaning of immediately and automatically is exactly what you'd think. [00:10:09] Speaker 01: No intentional delay and no intervention. [00:10:13] Speaker 01: And that's exactly what the contemporaneous guidance said in 2005. [00:10:16] Speaker 01: If you look at page 534 of the adopting release, it is almost word for word what I just said. [00:10:23] Speaker 01: You are right. [00:10:23] Speaker 01: They came back in 2016. [00:10:25] Speaker 01: They read in a de minimis exception that has no tie whatsoever to the regulatory text. [00:10:30] Speaker 01: So first, I don't think the text is ambiguous enough to allow them to do it. [00:10:34] Speaker 01: And two, Justice Kagan already told us in Kaiser that an agency will rarely get deference if it flipped, as it did here. [00:10:42] Speaker 01: And boy, this doesn't seem like a very good candidate for that at all, because when they flipped in 2016, all they talk about is the purposes of the act. [00:10:50] Speaker 01: They don't make any effort to tie it to the text. [00:10:52] Speaker 01: Even the discussion of policy is pretty thin. [00:10:55] Speaker 01: And then when they revisit it here in 2020, Judge Rao, and this is at the top of page 83 of the Joint Appendix, it's literally two sentences. [00:11:04] Speaker 01: And only the second sentence doesn't work. [00:11:06] Speaker 01: And all it says is we looked at this in 2016. [00:11:09] Speaker 01: And for the same reasons, we're doing it here, except that here they're doing it for displayed prices. [00:11:14] Speaker 01: This is supposed to be the prices that the market tells you the fair value is. [00:11:18] Speaker 01: And they never looked at whether repricing those frustrates the exchange act and its purposes. [00:11:24] Speaker 06: Well, with Citadel. [00:11:25] Speaker 06: So Citadel, though, didn't challenge the interpretation in 2016. [00:11:31] Speaker 01: In all fairness, not to this court, Judge Rao. [00:11:33] Speaker 01: We did challenge it to the commission. [00:11:34] Speaker 01: We put in comment letters pointing to the regulatory text. [00:11:38] Speaker 01: But at the time, they said, we're only doing this with non-display. [00:11:41] Speaker 01: The stuff you can't see that you just want to go fishing for in the dark. [00:11:45] Speaker 01: But we're not doing it to display prices. [00:11:47] Speaker 01: So we didn't petition this court for review. [00:11:50] Speaker 01: It wasn't until they did that here that we've come in, obviously, and brought it to this court. [00:11:54] Speaker 01: And at the end of the day, Judge Rao, if I'm right that they can't take advantage of power, then it's just the regulation. [00:12:01] Speaker 01: And what does it mean for a quotation to be immediately and automatically executable? [00:12:06] Speaker 01: It means you can't slow it down at the exchange. [00:12:09] Speaker 01: And once it hits the exchange, you can't tinker with it. [00:12:12] Speaker 01: That's the whole meaning of immediately and automatically. [00:12:15] Speaker 01: And what they've done is say, well, not immediate, but as long as it doesn't take too long that we think it frustrates the purposes of the act. [00:12:22] Speaker 01: And they flipped the default of automatically. [00:12:24] Speaker 01: They never interpreted that word. [00:12:25] Speaker 01: Instead of automatic execution, you get automatic repricing. [00:12:29] Speaker 01: It's the exact opposite of what the regulation requires. [00:12:33] Speaker 01: So, you look, we have both the frontline argument by the way that it's not consistent with the reg but but the fallback argument by the way Judge Ralph doesn't attack at all 2016 or isn't inconsistent with it. [00:12:44] Speaker 01: Even if this de minimis gloss can somehow be put on the regulation, they still didn't hear. [00:12:50] Speaker 01: offer any reasoned basis for saying, here's why extending that to displayed prices doesn't frustrate the purposes of the exchange act. [00:12:58] Speaker 01: There's no analysis of that in the order. [00:13:00] Speaker 01: As I say, it's two sentences at the top of page 83, and all it does is point back to 2016, which of course never looked at this extension for displayed prices. [00:13:09] Speaker 01: That argument we have, regardless of [00:13:12] Speaker 06: You know what one thinks about 2016 with the interpretation of immediately and automatically be different for displayed versus not displayed. [00:13:22] Speaker 01: Well, I don't think it is our frontline argument or frontline argument is they got it wrong in 2016. [00:13:28] Speaker 01: fine, they get the benefit of that for the purpose of the exchange, but if they're going to extend it that's still the basis for their order and this court is required by the APA to say you put a gloss on this that is just not consistent with the regulation, but on the fallback argument, Judge [00:13:44] Speaker 01: Absolutely. [00:13:45] Speaker 01: You could easily say, well, look, even if you think repricing doesn't affect for the stuff over here in the dark that you can't see, it does very much frustrate the purpose of the Exchange Act to do it with respect to displayed liquidity, right? [00:14:00] Speaker 01: Because the whole idea of this protected quote system, which doesn't apply to non-display, it's only for displayed quotes. [00:14:06] Speaker 01: The whole idea is you got a best bid and a best offer, and those are driven by market forces. [00:14:12] Speaker 01: And once you have them, everybody's required to trade at them. [00:14:16] Speaker 01: You can't mess up the investor by trading at some different price than you could get on some other exchange. [00:14:22] Speaker 01: But the whole system, the reason you offer that insurance to the investor is because you're confident that the bid and offer are actually the best prices out there in the market, driven by market forces. [00:14:34] Speaker 01: Here, they're requiring us to treat these things like they're the best bid or offer on the market when we know [00:14:40] Speaker 01: that when we've got a large order, we're gonna get to IEX on the very last piece and it's gonna fade away from us, right? [00:14:46] Speaker 01: We have to treat it like it's real when we know in fact it's phantom. [00:14:51] Speaker 01: And that's at odds with the system. [00:14:53] Speaker 01: And if the SEC wanted to try to do it for displayed prices, it at least needs to explain why it doesn't frustrate the purposes of the act. [00:15:00] Speaker 01: And it didn't even try here. [00:15:06] Speaker 06: Do my colleagues have any questions? [00:15:10] Speaker 06: One more question. [00:15:14] Speaker 06: So I guess I wanted to understand more about this question about asymmetry. [00:15:21] Speaker 06: So all incoming traffic has to cross over IEX's speed bump. [00:15:26] Speaker 01: That's right. [00:15:26] Speaker 06: That's correct, right? [00:15:27] Speaker 06: So it's symmetrical as to the speed bump. [00:15:32] Speaker 01: Well, sorry, Judge Riley, it was for the non-displayed, right? [00:15:36] Speaker 01: But this automatic repricing makes it asymmetrical because [00:15:40] Speaker 01: You know, you put the quotation up there and while everybody else is trying to hit it and get through the speed bump and execute against it, they're automatically repricing during that 350 microsecond delay. [00:15:52] Speaker 01: So it's now asymmetric and it hurts just the liquidity taker side of the market. [00:15:57] Speaker 06: But doesn't, I mean, doesn't the SEC routinely approve rules with differential market effects? [00:16:06] Speaker 06: I mean, isn't that, [00:16:08] Speaker 06: same difference here as it would be with other types of orders that move in that way. [00:16:14] Speaker 01: So I don't think so, Judge Rao. [00:16:15] Speaker 01: I'm not here to tell you. [00:16:16] Speaker 01: Obviously, the question is whether it's unfair discrimination under the Act. [00:16:20] Speaker 01: Sure, there are some kinds of discrimination that are not unfair, but it seems to me if the commission wanted to justify this, we know it's discriminatory. [00:16:29] Speaker 01: We know it helps liquidity providers and hurts liquidity takers. [00:16:32] Speaker 01: I don't think anybody doubts that. [00:16:34] Speaker 01: So the question is just, is it unfair? [00:16:35] Speaker 01: And it seems to me they've got to do two things. [00:16:39] Speaker 01: They've got to be right or at least fair and reasoned about the benefits, right? [00:16:44] Speaker 01: What they're attacking. [00:16:45] Speaker 01: They've got to correctly understand the problem and what they get from it. [00:16:49] Speaker 01: and they've got to correctly understand the costs. [00:16:52] Speaker 01: And here they messed up both sides, right? [00:16:55] Speaker 01: They took as evidence of latency arbitrage, something that's just evidence of normal large trading, and then they assumed away the costs and sort of said, well, you can deal with it through routing, but not looking at the costs of rerouting, which as I tried to explain earlier, Judge Walker, real. [00:17:10] Speaker 01: So if they'd done that on both sides of the ledger, maybe, as I said to you earlier, they'd be able to get away with a proposal like this, [00:17:17] Speaker 01: But in no event can they protect it. [00:17:19] Speaker 01: They have this innovation story they want to tell. [00:17:21] Speaker 01: That's fine. [00:17:22] Speaker 01: If they're right about this, let the market decide. [00:17:25] Speaker 01: Liquidity providers should flock to IEX if they're right. [00:17:29] Speaker 01: But what they can't do is let the platform itself start monkeying around and interfering with the trades. [00:17:37] Speaker 01: and then claim that those are protected, not without a change to their rule. [00:17:41] Speaker 01: Their rule says immediately and automatically. [00:17:43] Speaker 01: The whole idea is if you've got the best bidder offer driven by the market, you get protection. [00:17:48] Speaker 01: It's not driven by the market here. [00:17:50] Speaker 01: It's driven by a formula that the market is using to readjust the price that is the result of market forces. [00:17:56] Speaker 01: So if they want to do this, let them do it, but let them compete as they say they want to. [00:18:01] Speaker 01: Don't let them do it having interfered with the market and then claim this protection as benefit of rule 611. [00:18:07] Speaker 06: And so your argument is that rule has to be updated through notice and comment rulemaking. [00:18:13] Speaker 06: Yes, he wants to update it. [00:18:15] Speaker 01: Yeah, I mean, look, if they want to say it doesn't have to be immediately and automatically executable, you can have an intentional delay and you can have intervention by the agency. [00:18:24] Speaker 01: It's perfectly fine. [00:18:25] Speaker 01: They've just got to choose different words. [00:18:26] Speaker 01: But again, Judge Rao, you don't have to agree with me on that because even if I'm wrong and there is some de minimis exception that can be read into that language, notwithstanding its natural meaning, they still here did not do what they tried to do back in 2016. [00:18:41] Speaker 01: They didn't say, okay, we're extending it to displayed prices. [00:18:45] Speaker 01: Here's why that extension doesn't frustrate the purposes of the act. [00:18:48] Speaker 01: They pointed back to 2016, but of course in 2016, [00:18:51] Speaker 01: they were never looking at displayed prices. [00:18:54] Speaker 01: So they've got an APA problem anywhere they go, although I will say, I think that it's more fundamental than they recognize. [00:19:04] Speaker 06: My colleagues have any other further questions? [00:19:07] Speaker 06: Okay, thank you. [00:19:08] Speaker 06: We will hear next from the SEC. [00:19:15] Speaker 05: Good morning and may it please the court, Emily Truperisi for the Securities and Exchange Commission. [00:19:20] Speaker 05: The Commission's order in this case, approving IEX's proposal to offer its customers a new order type, was the product of reasoned decision-making, supported by substantial evidence, and should be affirmed. [00:19:33] Speaker 05: I would like to go straight to this idea that it's large orders that are turning on the CQI, which is something that I heard from Petitioners Council. [00:19:42] Speaker 05: The Commission's large orders that were turning on the CQI [00:19:47] Speaker 05: What the commission found looking at the data in the record is that, and it looked specifically at the extensive data in the record for what was happening at the time that CQI and these small milliseconds and microseconds. [00:20:00] Speaker 05: And it found that the stark disparity between the volume of marketable and displayed orders that were being executed versus non-displayed. [00:20:08] Speaker 05: And it's important to unpack that a little bit because the displayed versus non-displayed shows that it's [00:20:14] Speaker 05: the activity is targeting the orders that don't have the protection of the speed bump in the CQI. [00:20:22] Speaker 05: And the marketable orders shows that it's the aggressive orders taking it. [00:20:28] Speaker 05: It's not the midpoint orders. [00:20:29] Speaker 05: It's the ones that are crossing the spread aggressively. [00:20:32] Speaker 05: So there was extensive data in the record showing that the CQI only turns on when it's aggressive order taking the hallmarks of latency arbitrage. [00:20:41] Speaker 05: Then you look at the [00:20:42] Speaker 05: qualitative data in the record that the commission had before it, right? [00:20:46] Speaker 05: Numerous commentators wrote in saying that they could not trade in that manner and that those that do use these large orders, these intermarket sweep orders, would not have any problem filling because the commission made extensive findings that the accounting for this de minimis speed bump, IAXIS speed bump, is something that is commonplace in order routing. [00:21:09] Speaker 05: There would be no [00:21:10] Speaker 05: additional costs because it's commonplace order routing that people already have to take advantage of, take account of, because the delay at IEX is no different than the geographical latencies that are inherent in all the different exchanges. [00:21:26] Speaker 00: What do you say to Council's argument that this is inconsistent with the immediate and automatic language of the existing regime? [00:21:37] Speaker 05: Sure, I'd be happy to go to that argument, Your Honor. [00:21:39] Speaker 05: We think that the language really here is right clear, and I think it's just a misunderstanding of what that Rule 611 inquiry is getting at here. [00:21:48] Speaker 05: So Rule 611 says that protected quotations can't be traded through. [00:21:53] Speaker 05: And then you have to use the definitions to figure out what protected means. [00:21:56] Speaker 05: So in order to be protected, it has to be automated. [00:21:59] Speaker 05: And that's really the question here. [00:22:01] Speaker 05: Are these quotes automated? [00:22:03] Speaker 05: It's important to take a step back and think about this. [00:22:05] Speaker 05: There's only two choices. [00:22:06] Speaker 05: It's either automated or it's annual. [00:22:08] Speaker 05: And it simply makes no sense to think of these quotes as manual. [00:22:12] Speaker 05: You think of a trading floor and a human sort of intervening. [00:22:16] Speaker 05: These quotes are not manual. [00:22:17] Speaker 05: They are automated because they immediately and automatically execute. [00:22:22] Speaker 05: And to focus on the word immediately, as I heard some of the discussion focusing on, it cannot be that it has to immediately, it has to mean literally there's no delay at all because all quotes experience some delay and the commission [00:22:35] Speaker 05: but explain this very clearly in its automated quotations interpretation that it issued in 2016, right? [00:22:41] Speaker 05: All quotes have some geographic latency. [00:22:44] Speaker 05: So you can't take immediate to mean it's, to literally mean there's no geographic delay whatsoever. [00:22:49] Speaker 05: So once you've taken account of the premise that there's some geographic delay, the question is, well, is this the minimus IEX delay any different? [00:22:58] Speaker 05: And it's not, it's the commission found it's well within the same kinds of geographical [00:23:02] Speaker 05: latency limitations that all other protected quotes get. [00:23:05] Speaker 05: So it's, it's quite simply consistent. [00:23:08] Speaker 06: My question about that, I mean, immediately, I mean, isn't the natural meaning of immediate? [00:23:15] Speaker 06: I mean, sure, there might be a geographic latency. [00:23:19] Speaker 06: But if someone takes an intentional action to impose a delay, even if that delay is [00:23:24] Speaker 06: very small as it is here. [00:23:26] Speaker 06: I mean, doesn't that mean that it's not immediate? [00:23:30] Speaker 06: So when there's a geographic latency, immediate is just sort of limited by technology. [00:23:35] Speaker 06: How fast, how immediate can something be? [00:23:38] Speaker 06: But if someone takes an intentional action, an intentional delay, that doesn't strike me as consistent with the natural meaning of immediate. [00:23:47] Speaker 05: So your honor Citadel made that exact argument in 2016 in their comment letter about the plain meaning and the Commission addressed it in 2016 and it said there's nothing about the intentionality of the delay because it's simply the same from the perspective of the execution as the geographic delay. [00:24:04] Speaker 05: And so to the extent that the intentionality piece comes in, it just doesn't come in in the rule 611 analysis because the rule 611 analysis is simply about the duration of time. [00:24:15] Speaker 05: and the attentionality piece doesn't come in there. [00:24:17] Speaker 06: Does it go to the protected quotation side of things, right? [00:24:22] Speaker 06: Because the idea is that it's a protected quotation because of market forces, not because of an algorithm, as Mr. Wall said earlier. [00:24:35] Speaker 05: Well, it's protected because it's sort of just it's a factor from the definition. [00:24:39] Speaker 05: It's protected because it's automated and it's [00:24:42] Speaker 05: it's automated because it immediately and automatically executes. [00:24:46] Speaker 05: And it's important to go back, I think, your honor, to answer your question to the Reg NMS and what full 611 was supposed to do. [00:24:52] Speaker 05: The idea there was to encourage automated trading as opposed to manual trading. [00:24:58] Speaker 05: That was the specific purpose of the trade through exception in 2005. [00:25:03] Speaker 05: It gave the protected quote status to automated trading as opposed to manual because manual was too slow. [00:25:12] Speaker 05: The idea was to encourage automated trading and there's just nothing that's not automated. [00:25:16] Speaker 05: I mean, it makes no sense to think of IEX's quotes as not automated. [00:25:22] Speaker 05: It just doesn't make any sense to think of only the delimit quotes as not automated and therefore protected because then you have a strange situation where some of IEX's quotes are protected, but only the delimit ones aren't. [00:25:36] Speaker 05: people trading don't know which is which. [00:25:37] Speaker 05: So it just it just doesn't fit under the structure of the regulation itself to not consider these these quotes protected and therefore automated. [00:25:46] Speaker 05: The questions about access to the liquidity and what Mr. Wall was referring to as phantom liquidity, that is addressed extensively by the commission. [00:25:55] Speaker 05: But under the Exchange Act analysis, as opposed to the Rule 11, excuse me, the Rule 611 analysis, and the commission found that there would not be [00:26:02] Speaker 05: extensive quote fading and everything but that that goes to that analysis but the rule 611 analysis is really very clear under the terms of the statute you're either you know you're either automated or manual here you're automated if you're automated you're protected under rule 611. [00:26:18] Speaker 03: What do you say to the argument that [00:26:22] Speaker 03: The SEC itself caused the problem of latency arbitrage that IEX is going to elaborate links to solve because the cause of latency arbitrage was reg NMS. [00:26:42] Speaker 05: Your honor, I think I would say that, you know, the issue before the Commission here is whether the order is consistent with the Exchange Act. [00:26:51] Speaker 05: And so the Commission has to take these things as they come. [00:26:54] Speaker 05: And, you know, the Commission is balancing competing policy concerns in terms of the Exchange Act and 11CAPA and the congressional directives that are set out there to create this national market system. [00:27:08] Speaker 05: But the issue here in front of the court is simply by their IAX's proposal to offer this new order type to its customers is consistent with the Exchange Act. [00:27:16] Speaker 05: And here the commission found that it clearly was. [00:27:18] Speaker 05: There was extensive data in the record. [00:27:20] Speaker 05: And I didn't want to touch on, I see my time is up. [00:27:23] Speaker 05: And so I just wanted to quickly touch on, with the court's permission, the idea that the commission ignored Citadel's data. [00:27:31] Speaker 05: It simply did not. [00:27:32] Speaker 03: It goes on for ages. [00:27:33] Speaker 03: Before you do that, though, and I understand it. [00:27:37] Speaker 03: perhaps directly related to the question before us, but it does seem to inform it. [00:27:45] Speaker 03: Do you agree that Reg NMS was sort of the first mover, the cause of all this latency arbitrage trouble that Citadel says doesn't exist, but IEX says does exist and SEC does exist and IEX is trying to fix? [00:28:04] Speaker 05: Your honor, I think pinpointing the cause of, you know, a market phenomenon like latency arbitrage is a very difficult thing to do. [00:28:10] Speaker 05: And I don't think the commission has said anything in terms of that. [00:28:12] Speaker 05: I mean, certainly, you know, regulations can have consequences, both intended and unintended, but I don't think that we necessarily would agree with the petitioner's characterization there. [00:28:25] Speaker 06: Ms. [00:28:25] Speaker 06: Peruse, can I ask you, since briefing in this case, have other exchanges sought to follow IEX's model [00:28:34] Speaker 06: And if so, how has the SEC handled those proposals, if there have been any? [00:28:40] Speaker 05: I don't believe there have been any. [00:28:42] Speaker 05: Occasionally, someone will copy a certain feature of the plan, but then sometimes they will take them back. [00:28:49] Speaker 05: But I don't believe there is any true copycat of this proposal in the market. [00:28:56] Speaker 05: Precisely because to do so, you would need to already have the infrastructure. [00:28:59] Speaker 05: You would have to speed bump. [00:29:02] Speaker 05: and the CQI and all the pieces that lead up to the delimit order yourself. [00:29:07] Speaker 05: And there simply aren't any other changes that have all that infrastructure. [00:29:10] Speaker 05: So I don't believe there are any other copycats. [00:29:12] Speaker 06: Thank you. [00:29:16] Speaker 06: Okay. [00:29:18] Speaker 06: Unless the court has any questions. [00:29:21] Speaker 06: No, thank you very much. [00:29:21] Speaker 05: We would ask that the order be affirmed. [00:29:23] Speaker 05: Thank you. [00:29:24] Speaker 06: We'll now hear from Ms. [00:29:25] Speaker 06: Stetson. [00:29:27] Speaker 04: Good morning, Your Honors, and may it please the court. [00:29:29] Speaker 04: I'm Kate Stetson, representing IEX as the intervener. [00:29:33] Speaker 04: I want to make just a couple points on the primary argument in this case, the latency arbitrage issue and the solution that IEX devised. [00:29:40] Speaker 04: And then I do want to be sure to talk about this immediacy issue, Judge Sentel and Judge Rao, that you raised as well. [00:29:46] Speaker 04: But just on the latency arbitrage point to begin, Judge Rao, I think one of your questions pointed at this as well. [00:29:53] Speaker 04: This primary argument of citadels is a substantial evidence argument. [00:29:58] Speaker 04: That's unusual. [00:29:59] Speaker 04: You know, usually there's a lack of statutory authority argument or some other more significant APA hook. [00:30:06] Speaker 04: So here, what we are looking for is, was there substantial evidence in the record that latency arbitrage occurred? [00:30:14] Speaker 04: And the commission found, yes. [00:30:17] Speaker 04: Those sites include Joint Appendix 62, 87, 89. [00:30:23] Speaker 04: When was latency arbitrage happening? [00:30:25] Speaker 04: The commission concluded based on IEX's several months worth of data that it is happening in those microseconds right before a price changes. [00:30:36] Speaker 04: And I wanna mention something that Mr. Wall said about the dogs barking if there is data of latency arbitrage. [00:30:44] Speaker 04: There are so many dogs. [00:30:46] Speaker 04: There are so many comments in this case from hundreds of investment advisors and companies representing [00:30:55] Speaker 04: billions of dollars under management and millions of investors, including among others, high frequency traders, XTX and Virtue. [00:31:06] Speaker 04: Virtue in particular does precisely what Citadel does. [00:31:10] Speaker 04: We can talk about what we're calling the retail issue in a minute if you all like, but understand that Virtue supported this delimit order and does exactly what Citadel does. [00:31:22] Speaker 04: With respect to Mr. Wells' other comment about this evidence that IEX put in over several months of data and which the commission evaluated and accepted as evidence of, quote, normal large trading, that is simply not true. [00:31:37] Speaker 04: What we are talking about is evidence of a huge amount of trading going on in the couple few microseconds before a price changes. [00:31:47] Speaker 04: I just happened to blink my eyes. [00:31:50] Speaker 04: is about 200 times longer than the couple microseconds that we're talking about. [00:31:56] Speaker 04: So when Citadel talks about rooting 15% of its batched retail trades at that very moment, that is Citadel trying to hit that stale quote. [00:32:08] Speaker 04: That is what is happening. [00:32:09] Speaker 04: It is not evidence of normal large trading. [00:32:12] Speaker 04: With respect to the data that Citadel put forward, and I wanna make clear, [00:32:19] Speaker 04: there is a difference between disagreeing with a commenter and ignoring a commenter. [00:32:27] Speaker 04: And I think a lot of what Citadel's brief tries to do is to shoehorn this into some model where the commission didn't ignore Citadel's data, didn't pay sufficient attention. [00:32:40] Speaker 04: And there is a huge amount of work that the commission did in this order. [00:32:47] Speaker 04: to take into account that data and to talk about it and explain it. [00:32:52] Speaker 04: And one of the things that Ms. [00:32:53] Speaker 04: Parisi mentioned I think is important is that data comparing the difference between what's happening on the displayed order side and what's happening on non displayed. [00:33:02] Speaker 04: The other thing that I would mention is the commission's finding at appendix 55 to 56 that the people who are doing those trades, the entities doing those trades in those microseconds [00:33:14] Speaker 04: are proprietary trading firms, high frequency traders. [00:33:18] Speaker 04: Those high frequency traders include Citadel. [00:33:21] Speaker 04: Citadel is trading on behalf of retail investors. [00:33:24] Speaker 04: That's the phrase it uses. [00:33:26] Speaker 04: Citadel pays millions, hundreds of millions of dollars to brokers in order to get those retail orders so that it can batch them, route them as it sees fit, internalize them if necessary, and profit off of them. [00:33:40] Speaker 04: That's Citadel's model. [00:33:42] Speaker 04: And that's why the retail investor is really just a red herring. [00:33:45] Speaker 04: Let me talk briefly. [00:33:46] Speaker 04: Yeah. [00:33:47] Speaker 03: Just to make sure I understood what you just said. [00:33:49] Speaker 03: Are you saying that when Citadel says that 40% of its trades on IEX are on behalf of retail customers, that in fact, those trades could be using latency arbitrage tactics? [00:34:03] Speaker 04: 100% true. [00:34:04] Speaker 04: Yes. [00:34:04] Speaker 03: And then I hope we'll address that in rebuttal if he disagrees. [00:34:10] Speaker 04: That is exactly right. [00:34:11] Speaker 04: And that explains, as I mentioned Judge Walker, why such a vast percentage of those trades is happening in those couple microseconds. [00:34:20] Speaker 04: You have dozens of commenters saying, we cannot use the technology that these high-frequency traders have in order to do this. [00:34:27] Speaker 04: There's a comment from FEMA's trading that says, we are in the middle of a speed war that we never signed up to fight. [00:34:34] Speaker 04: The only people who are able to exploit those microseconds are high frequency traders like Citadel and like Virtue, which supported this order. [00:34:45] Speaker 04: I know my time is up, but I do want to briefly. [00:34:47] Speaker 06: I do have one question. [00:34:48] Speaker 06: Citadel suggests that really it's IEX that's engaging latency arbitrage by repricing, you know, by automatically repricing when the indicator is triggered. [00:34:59] Speaker 06: And what do you make of that argument? [00:35:02] Speaker 04: You know, I think [00:35:03] Speaker 04: To begin with, I think it's a little bit rich, because I think as even some of Citadel's amici acknowledge, and I'm talking about the Vollmer brief at footnote five, there have been a number of innovations that other exchanges have implemented, including NASDAQ, NYSE, that are designed to either supply co-location, more auspicious location for a fee, or faster data connections for a fee. [00:35:33] Speaker 04: So far from latency arbitrage, what IEX was founded to do was to actually try to level the playing field so that the daily investors, the people who are actually putting retirement money into retirement funds that are managed by these long-term fundamental investors so that they have a shot because no one else is able, as I said, to exploit those microseconds except for high-frequency traders. [00:35:58] Speaker 04: The other thing, I guess, to mention Judge Rao is when that price crumbles, [00:36:03] Speaker 04: That is what IEX is doing in those moments is essentially fighting fire with fire because the reason that the high-frequency traders are able to exploit those microseconds, those tiny moments are because they are anticipating the price change. [00:36:20] Speaker 04: That's exactly what IEX is doing. [00:36:22] Speaker 04: So to say that we're engaging in latency arbitrage when we're actually trying to level the playing field, I think is a bit of a misdirection. [00:36:29] Speaker 04: On the immediate and automatic point, [00:36:33] Speaker 04: I don't think Judge Rao that it's right to say that a speed bump delay like IEX is somehow qualitatively different than say a geographic delay. [00:36:46] Speaker 04: Exchanges make choices all the time about where to locate their servers. [00:36:50] Speaker 04: Should we locate in Mahwah, Chicago, Miami? [00:36:54] Speaker 04: Exchanges make choices all the time and they build their high-frequency traders all the time for even locating servers in different parts of a room [00:37:03] Speaker 04: in order to make sure that those servers are more quickly connected. [00:37:07] Speaker 04: Exchanges for ages have tried to make sure that to the extent everybody's paying the same price, but are located in different parts of the room, that there's extra cable in order to make sure that there's no tiny latency between the server at the north end of the room and the server at the south end. [00:37:24] Speaker 04: All of these are examples of what we would call geographic latencies, but they're just as intentional as anything that IEX designed. [00:37:33] Speaker 04: And what the commission concluded in 2016 was that the immediate language means so de minimis that it doesn't interfere with fair and efficient trading. [00:37:45] Speaker 04: Now the argument Mr. Wall offered, Ms. [00:37:48] Speaker 04: Parisi is exactly right. [00:37:49] Speaker 04: This is exactly the argument that was offered in 2016 that immediate means immediate. [00:37:56] Speaker 04: Immediate though does not mean instantaneous. [00:38:00] Speaker 04: If you, Judge Rao, asked me to come to your chambers immediately, it would take me a while to get there. [00:38:06] Speaker 04: If you asked me to come to your chambers instantaneously, I would say, I'm sorry, I'm not capable of doing that. [00:38:11] Speaker 04: There's a difference between immediate and instantaneous, and that difference is within the commission's bailiwick and purview to interpret. [00:38:20] Speaker 04: What it came down to in 2016 is exactly what it comes down to today, which is, does this de minimis delay [00:38:28] Speaker 04: interfere with the fair and efficient execution of an order. [00:38:32] Speaker 04: What IEX's- Is your view Ms. [00:38:34] Speaker 06: Dutson that immediate is ambiguous and so we should defer to the SEC's interpretation? [00:38:40] Speaker 04: I think that is the SEC's position and I can see the merit in that position for precisely the reason I just said. [00:38:48] Speaker 04: I think when people think about immediate and you're not thinking in terms of these eye blink moments, [00:38:56] Speaker 04: immediate might mean something very different. [00:38:59] Speaker 04: But when you're talking about these eye blink moments, immediate has to mean something that's a little bit more accommodating. [00:39:07] Speaker 04: It's exactly why the commission, even with its protected quotes, builds in a one second, essentially grace period. [00:39:16] Speaker 04: No one is found to be in violation of the rule as long as that quote changed a second or less before whatever order they executed. [00:39:25] Speaker 04: there's an acknowledgement that the systems can only go as fast as the systems can go. [00:39:31] Speaker 04: And here where you have a targeted, I'm sorry, Judge Santel. [00:39:35] Speaker 00: It bothers me that you, if what you just said, go as fast as the systems can go. [00:39:40] Speaker 00: The geographic delay, if you would, between immediate and instantaneous recognizes that that's as fast the system can go. [00:39:49] Speaker 00: Here you are deliberately [00:39:51] Speaker 00: putting a, or you're not, but the rulemaking is deliberately putting a delay into the course of the transaction that takes it out of the instantaneous, but may also take it out of the immediate. [00:40:07] Speaker 00: Isn't there a difference between the geographic delay that is inherent and unavoidable and the inserted delay of the roadblock, which is inevitable? [00:40:20] Speaker 04: Judge sent out two answers. [00:40:22] Speaker 04: The first is that as Ms. [00:40:23] Speaker 04: Parisi mentioned, that is exactly the argument that was made in 2016 in which the commission thoroughly evaluated and rejected. [00:40:30] Speaker 04: The second answer is, as I just mentioned to Judge Rao, the idea that geographic latencies are unavoidable is simply not the case. [00:40:41] Speaker 04: Exchanges make choices all the time about where to locate their servers, how fast to connect their particular customers to a particular server, [00:40:50] Speaker 04: Where in the room, as I said, to locate the server, those are all geographic latencies of some degree or another. [00:40:56] Speaker 04: So drawing a distinction between the kind of coil delay that we're talking about here with IEX and the kind of coil delays that are common in other servers, including, as I said, to try to equalize high-frequency traders access if there are slightly different from each other in a room such that one gets to another, you know, one microsecond before, [00:41:19] Speaker 04: All of those are intentional choices. [00:41:22] Speaker 04: And what the commission concluded in 2016 and reiterated here is that word immediate in this context means a delay that is so de minimis, it's not sort of human, there's no human interference, which was the whole reason why this immediate order began to exist. [00:41:41] Speaker 04: It's so de minimis as not to interfere with fair and efficient access. [00:41:47] Speaker 04: And I think what Mr. Wall's client is seeking [00:41:50] Speaker 04: is what we would say is unfair access because they are seeking to exploit that tiny moment of time when a price is changing before other people, other liquidity providers, and liquidity takers are able to get there. [00:42:04] Speaker 04: And I want to perhaps end on this if there are no further questions. [00:42:08] Speaker 04: This is discrimination against a type of high frequency trader that engages in predatory latency arbitrage. [00:42:16] Speaker 04: That is the discrimination, if we want to use that word that we're talking about. [00:42:20] Speaker 04: What the SEC concluded, what IEX submitted and what the SEC evaluated and adopted was that this delimit order helps the market overall. [00:42:29] Speaker 04: It helps liquidity providers. [00:42:31] Speaker 04: It helps market makers. [00:42:32] Speaker 04: That's why you have XTX and Virtue joining these comments. [00:42:36] Speaker 04: It helps liquidity takers because it ensures that liquidity actually exists and isn't just shifting over to the dark markets or off exchange. [00:42:45] Speaker 04: This order helps the market overall. [00:42:48] Speaker 04: The people it doesn't help [00:42:50] Speaker 04: are the people who are trying to essentially skin that predatory tax off of a changing price. [00:42:57] Speaker 04: If there are no further questions, further questions. [00:43:02] Speaker 03: Okay. [00:43:02] Speaker 06: Thank you. [00:43:04] Speaker 06: Sorry. [00:43:06] Speaker 03: Yes. [00:43:06] Speaker 03: Were you saying the sets in the immediate immediately is ambiguous or you win if it's ambiguous and you also win if it's. [00:43:15] Speaker 04: The latter. [00:43:16] Speaker 04: The latter. [00:43:17] Speaker 04: I think what the SEC said in its brief, I think in a footnote, is that the interpretation is, oh, deference under Kaiser. [00:43:27] Speaker 04: That's clearly true, just given the length and the thoroughness of the consideration, the specificity of what we're talking about, the technicalities of what we're talking about. [00:43:38] Speaker 04: But if it's unambiguous, then we win also. [00:43:40] Speaker 04: So the answer is both. [00:43:45] Speaker 06: Thank you, Ms. [00:43:45] Speaker 06: Stetson. [00:43:47] Speaker 06: Thank you. [00:43:47] Speaker 06: Mr. Raul, I'm not sure you have time left, but we will give you an additional two minutes for rebuttal. [00:43:53] Speaker 01: So three quick points. [00:43:55] Speaker 01: Let me start with Rule 611. [00:43:56] Speaker 01: Your right, Judge Walker. [00:43:58] Speaker 01: Regulation NMS did create the fragmentation, the protected quote, stitches it back together, and it's important to enforce it. [00:44:04] Speaker 01: The language of the regulation is not anything about interference with fair and efficient trading. [00:44:08] Speaker 01: It says immediately and automatically [00:44:11] Speaker 01: executes an order. [00:44:12] Speaker 01: And you're right, Judge Rao. [00:44:15] Speaker 01: Of course, things take time to do, and it doesn't mean you're not doing them immediately. [00:44:18] Speaker 01: But when you introduce an intentional delay, it's no longer immediate. [00:44:22] Speaker 01: And when you tinker with the quote, it's no longer automatic. [00:44:25] Speaker 06: Can you respond to Ms. [00:44:26] Speaker 06: Stetson's point that it's actually that there are intentional ways that traders affect geographic latency, so it's not really qualitatively different to have something like the speed bump [00:44:41] Speaker 01: Sure, so two points. [00:44:42] Speaker 01: One, it's not true in practice, as we explained to page 372 of the JA, when we have a large order, Citadel sends it out to the exchanges simultaneously. [00:44:50] Speaker 01: Sure, there's a little bit of geographic latency as you go to the different exchanges, but the difference isn't large enough to allow anybody else to see what's happening on the other exchanges and react. [00:45:01] Speaker 01: So because we have a best execution obligation, we send it out everywhere at once. [00:45:05] Speaker 01: This is lengthening the delay, as Judge Sentel said, and it allows everybody at IEX to see what's going on, and then they reprice. [00:45:12] Speaker 01: And the second thing is, it's just not a natural way to use language, Judge Rao. [00:45:16] Speaker 01: Sure, I tell my kids to immediately make their bed in the morning. [00:45:18] Speaker 01: They got to get out of bed and turn on the light. [00:45:20] Speaker 01: Nobody thinks they didn't comply with my instruction. [00:45:23] Speaker 01: But we sure do if they get up and read books or play with toys for a while. [00:45:26] Speaker 01: And in case you think there's any doubt about that, all you need to do is look at the adopting release with rule 611. [00:45:33] Speaker 01: It says at page 534, it's not automated if you have any other type of intentional device that would delay the action. [00:45:40] Speaker 01: The commission read it exactly the way you do. [00:45:43] Speaker 03: Mr. Wall, it seems that Citadel pays for those devices on several other exchanges. [00:45:49] Speaker 03: So tell me if I have the facts wrong. [00:45:52] Speaker 03: I'm imagining Citadel and company X that are equidistant from an exchange. [00:46:03] Speaker 03: And so they send a communication to the exchange at the exact same moment. [00:46:09] Speaker 03: But Citadel has paid extra money to that exchange so that its receiver is a little closer than the competitor's receiver is. [00:46:21] Speaker 03: I'm imagining a room with computers in it and there's like a box for Citadel and a box for the competitor. [00:46:25] Speaker 03: I'm sure this is probably vastly oversimplified, but Citadel pays the exchange money [00:46:30] Speaker 03: so that its receiver is in a better position, a better distance, a better location in that room than company X. Does that happen? [00:46:41] Speaker 01: Judge Walker, I think maybe it did years and years ago, and it's a wonderful narrative, I grant you, like it's a great story that Ms. [00:46:47] Speaker 01: Stetson told, but no, in this day and age, it's not true. [00:46:50] Speaker 03: I mean, Mr. Paul, and I, you know, just, it's not, we had a case last month about Skybeams communicating between MAWA and the other things. [00:47:02] Speaker 03: I don't think there was any party in the case, and they disagreed about a lot of stuff. [00:47:06] Speaker 03: But none of them disagree that the scenario I described happens where companies pay a little bit more money to an exchange like NASDAQ or New York Stock Exchange to have their little box closer than everyone else's little box. [00:47:19] Speaker 03: It's very expensive real estate. [00:47:20] Speaker 01: Yeah, no, no, Judge Walker. [00:47:21] Speaker 01: What I was going to say was some exchanges deal with this by having standard length cables and the exchanges that don't have that, everybody pays to co-locate. [00:47:29] Speaker 01: So XTX, Virtue, Two Sigma, all the firms that Miss Stetson named that are Citadel's competitors, they're all right there. [00:47:37] Speaker 01: There is no latency. [00:47:41] Speaker 01: I'm not saying they're not paying for it. [00:47:42] Speaker 01: I'm saying there's no competitive advantage that would give rise to latency arbitrage because everybody's got the same connectivity and everybody's got the same data fee. [00:47:51] Speaker 03: There's no co-location at an exchange that's slightly better than another co-location at an exchange. [00:47:58] Speaker 01: Judge Walker, I don't want to go that far. [00:48:00] Speaker 01: What I want to say is my understanding is that's not a common problem across the exchange when you talk to traders. [00:48:05] Speaker 01: And at a minimum, the commission didn't put on that kind of evidence. [00:48:08] Speaker 01: That's the interesting thing about the order. [00:48:10] Speaker 01: If that's true, what you're playing out and what Ms. [00:48:13] Speaker 01: Stetson said, it ought to be easy. [00:48:15] Speaker 01: We ought to come in with examples. [00:48:17] Speaker 01: There's facts on the ground. [00:48:19] Speaker 01: We could just show where the servers are and all the co-location stuff. [00:48:22] Speaker 01: The commission didn't do that. [00:48:23] Speaker 01: And it didn't even try to take actual trades. [00:48:25] Speaker 01: and say, here's the latency arbitrage. [00:48:27] Speaker 01: It looked at aggregate statistics and said, see, those show that there's a lot of stuff going on when the signal is turning on. [00:48:35] Speaker 01: And this was the second point I was going to make in the rubble, which is, if you, none of that shows what's turning the signal on. [00:48:43] Speaker 01: So Ms. [00:48:43] Speaker 01: Stetson is right that at page 88 of the joint appendix, they say large orders don't turn it on. [00:48:49] Speaker 01: But when they say, as shown by the data above, all that they're pointing to on pages 87 and 88, [00:48:55] Speaker 01: is the stuff about there being a lot of trading when the signal is on. [00:48:58] Speaker 01: And we put in this actual order at page 372 of the joint appendix. [00:49:02] Speaker 01: We said, here's an actual order on behalf of retail investors. [00:49:06] Speaker 01: It triggered the signal just because it's a large order, has nothing to do with arbitrage. [00:49:10] Speaker 01: And as I stand here today, having read everything in this case, I still don't understand what the commission's basic response is to the fact that this is the kind of trade that turns it on because it makes sense, right? [00:49:21] Speaker 01: You're taking a lot across a lot of exchanges. [00:49:24] Speaker 01: IEX is watching that. [00:49:26] Speaker 01: Of course, it's going to predict that the price is going to move. [00:49:28] Speaker 01: The signal is going to come on. [00:49:29] Speaker 01: By definition, it's probably a good size trade or good number of orders, right? [00:49:33] Speaker 01: Because you need a whole lot of liquidity. [00:49:35] Speaker 01: This is a small player. [00:49:36] Speaker 01: It doesn't have a lot of liquidity. [00:49:38] Speaker 01: So then it says, oh, we have a lot of things going on in our shop when the signal comes on. [00:49:42] Speaker 01: Of course you do. [00:49:43] Speaker 01: It's exactly what you would expect. [00:49:45] Speaker 01: All of the markout data, the spread crossing, it's exactly what you would expect to see if large orders turn the signal on. [00:49:51] Speaker 01: And so I would just point back to the commission's order. [00:49:53] Speaker 01: And the third thing I would say, Judge Walker, to go to your call with Ms. [00:49:56] Speaker 01: Stetson, that's not where the SEC started. [00:49:58] Speaker 01: Ms. [00:49:59] Speaker 01: Parisi said, look, it's commonplace to do this as a matter of routing. [00:50:02] Speaker 01: That's not true. [00:50:03] Speaker 01: Citadel sends these orders on behalf of retail investors to exchanges simultaneously when it's a large order. [00:50:09] Speaker 01: We explained that to the commission. [00:50:11] Speaker 01: There's nothing to the contrary in the record. [00:50:13] Speaker 01: Could we reroute and hold back orders and go to IEX first? [00:50:17] Speaker 01: We could with the costs I explained earlier, either higher costs or missed executions to retail investors who won't get the bulk of what they want because the IEX tail is wagging the New York Stock Exchange and NASDAQ dog. [00:50:30] Speaker 01: Now, Ms. [00:50:30] Speaker 01: Stetson takes it in another direction. [00:50:32] Speaker 01: She says, oh, they're batching, they're bundling, and so it's evidence of latency arbitrage. [00:50:37] Speaker 01: And with all respect to Ms. [00:50:38] Speaker 01: Stetson, [00:50:39] Speaker 01: That's false. [00:50:40] Speaker 01: We told the commission it's false. [00:50:41] Speaker 01: I'm happy to supplementally brief it. [00:50:43] Speaker 01: We have best execution obligations. [00:50:45] Speaker 01: Citadel does not batch and try to time retail orders. [00:50:48] Speaker 01: It may fill some of them internally. [00:50:51] Speaker 06: How does that work if 15% of the retail orders are coming in when the signal is on? [00:50:56] Speaker 06: I mean, how do you explain that? [00:51:00] Speaker 01: Oh, so that part I think is fairly straightforward to address. [00:51:03] Speaker 01: Citadel handles more retail than anybody in the country, 40%. [00:51:06] Speaker 01: of the retail orders on behalf of investors out there in the country, right? [00:51:10] Speaker 01: So we have a lot of retail and we have some small orders and some one-offs, and sometimes IEX is good for that. [00:51:16] Speaker 01: It doesn't have a lot, but sometimes it has a little bit of kind of random things. [00:51:19] Speaker 01: So you send a lot of small orders there. [00:51:22] Speaker 01: But the large orders that we sent, that's the 15%. [00:51:25] Speaker 01: And what we found is that that 15% we're turning the signal on, and as we explained, 99.3% of them in volume were large orders. [00:51:36] Speaker 01: Once our retail orders got large enough, they triggered the signal and it came on. [00:51:41] Speaker 01: And the commission's response to that at page 88 is just ipsy dicks it. [00:51:45] Speaker 01: All it says is, oh, but look at our data. [00:51:47] Speaker 01: There's a lot going on when the signal comes on. [00:51:49] Speaker 01: Of course, there's a lot going on. [00:51:51] Speaker 01: We're sending large retail orders. [00:51:53] Speaker 01: That's the 15%. [00:51:54] Speaker 01: Others are sending more large orders and fewer small orders in Citadel. [00:51:58] Speaker 01: So that's why even though it's only 15% for us, it creeps up to 24% of volume, 33% of orders. [00:52:05] Speaker 01: it's all the same phenomenon. [00:52:08] Speaker 01: And just to close Judge Walker with where I was before, these retail orders, there's nothing misleading about saying on behalf of retail investors. [00:52:17] Speaker 01: The example we gave at page 372 of the Joint Appendix is real. [00:52:21] Speaker 01: Maybe it's TD Ameritrade, maybe it's Schwab, maybe it's a pension fund, [00:52:24] Speaker 01: an institutional investor, they want a lot of shares. [00:52:27] Speaker 01: We don't hold that back and wait to take it to the market in some moment of arbitrage. [00:52:32] Speaker 01: We'd be violating best execution obligations if we did. [00:52:35] Speaker 06: How did the 15% show up in that? [00:52:38] Speaker 06: fraction, that tiny fraction of a second. [00:52:42] Speaker 01: Oh, Judge Rao, that is the key to the whole thing, right? [00:52:46] Speaker 01: Right there. [00:52:47] Speaker 01: They're not showing up when the signal is on. [00:52:49] Speaker 01: That's what the other side... They're triggering the signal. [00:52:52] Speaker 01: They're triggering the signal because IEX is sitting there and looking at these orders hit the other exchanges and saying, wow, [00:52:59] Speaker 01: there's a spike in demand or a spike in supply. [00:53:01] Speaker 01: So the offer is going to go up or the bid is going to go down. [00:53:05] Speaker 01: And so they're turning on the signal and then the order gets there having hit the speed bump and they treat that order once it hits as the volume or the order that they're talking about hitting when the signal is on. [00:53:16] Speaker 01: So of course there's a lot hitting when the signal is on. [00:53:20] Speaker 01: They have a formula designed to detect price changes [00:53:23] Speaker 01: and they can watch what's happening on other markets. [00:53:26] Speaker 01: Of course, there's a high correlation. [00:53:29] Speaker 01: Of course, you see crossing the spread. [00:53:31] Speaker 01: Of course, you see a lot of orders coming in. [00:53:33] Speaker 01: Of course, you see markout data showing that the price is running away from the liquidity. [00:53:36] Speaker 06: Is it just a race between the technology of your client and the technology of IEX too? [00:53:43] Speaker 06: go back and forth. [00:53:43] Speaker 06: I mean, isn't that ultimately in the market what's happening? [00:53:47] Speaker 01: I don't think so. [00:53:48] Speaker 01: It might be a race between Citadel and Two Sigma and XTX and Virtue and all the other high-frequency traders that, as I said, Judge Walker, have the same connectivity and same data. [00:53:57] Speaker 01: But no other exchange is doing this. [00:53:59] Speaker 01: This is pretty novel. [00:54:00] Speaker 01: Exchanges are meant to be platforms. [00:54:02] Speaker 01: They're meant to facilitate trading. [00:54:04] Speaker 01: This is an exchange, the only one that's doing this, that's reaching in and repricing the quotes themselves. [00:54:12] Speaker 01: And that's a sort of novel thing. [00:54:14] Speaker 01: And to get back to where I started, if you conclude on the first issue that they can have the delimit order, even though they haven't shown you real evidence of latency arbitrage, and even if they have Judge Walker, they haven't looked at the costs. [00:54:27] Speaker 01: They have not looked at the cost of retail and the cost of routing. [00:54:30] Speaker 01: Still during the argument, no one has addressed the cost of these rerouting changes. [00:54:34] Speaker 01: But even if you conclude that, you can't have it be protected under rule 611 for the reason that Judge Sentel got out earlier. [00:54:41] Speaker 01: It just doesn't square [00:54:43] Speaker 01: with the language of the regulation, right? [00:54:45] Speaker 01: Protected quote is meant to stitch back that fragmentation that you were talking about, Judge Walker, and it does it by looking at the best bid and offer as a result of market forces. [00:54:55] Speaker 01: If they want to tinker with those, we don't think they should be allowed to, but what they can't do then is say, well, that should be treated the same as every other bid and offer that is actually the result of market forces. [00:55:06] Speaker 01: Let them compete in the open marketplace. [00:55:08] Speaker 01: If liquidity providers like it, they'll go there and liquidity takers will have to go to get the liquidity. [00:55:14] Speaker 01: That's what Canada did when they did the same thing. [00:55:16] Speaker 01: No protected quotes. [00:55:18] Speaker 01: Let everybody have incentives to use the exchange and then decide, let the marketplace decide. [00:55:25] Speaker 03: I'll stop, Judge Rao. [00:55:28] Speaker 06: No, Judge Walker, if you have another question, please go ahead. [00:55:31] Speaker 03: Just one more. [00:55:34] Speaker 03: Your last statement about just letting the market play out. [00:55:39] Speaker 03: Here, it seems to be that's what IEX wants to do. [00:55:43] Speaker 03: And it's you who is going to a federal agency and saying, stop a private entity, IEX, from doing what they want to do. [00:55:54] Speaker 03: You're the one who's trying to kind of regulate your way into a market victory. [00:56:00] Speaker 01: So all respect, Judge Walker, I think we see it a little bit differently, right? [00:56:05] Speaker 01: Which is, [00:56:06] Speaker 01: We don't want the exchanges, that's right, to interfere with the market forces themselves. [00:56:12] Speaker 01: Private parties in the marketplace through buying and selling should be determining prices, not the exchanges. [00:56:18] Speaker 01: The Exchange Act says they are meant to facilitate [00:56:21] Speaker 01: fair and open market. [00:56:23] Speaker 01: Not that they're meant to pick winners and losers and reprice their quotes, but even if you think I'm wrong about that, I think clearly they're not pro market force on the Rule 611 side. [00:56:33] Speaker 01: If they really believed this innovation story, they would do what CBOE did when it submitted its proposal. [00:56:38] Speaker 01: It didn't say its quote should be protected. [00:56:40] Speaker 01: It said, let us do this. [00:56:41] Speaker 01: The commission disagreed. [00:56:43] Speaker 01: It flipped here for reasons it hasn't really addressed. [00:56:45] Speaker 01: But what IEX wants is the best of both worlds. [00:56:48] Speaker 01: It wants to be able to do the innovation, but then say that these quotes are protected, notwithstanding the regulatory text, so that it can lock liquidity takers into coming there, which drives up its revenues. [00:56:58] Speaker 01: Because let's be really clear, Judge Walker, IEX makes money in two ways. [00:57:02] Speaker 01: It makes money by having protected quotes at the best bid and offer and by having more trading volume. [00:57:07] Speaker 01: This change hasn't driven up in the real world its actual [00:57:10] Speaker 01: executions, it's not actually helping the market, but it does drive up the amount of liquidity it has at what's called the NBBO, the best bidder offer. [00:57:18] Speaker 01: And that means more money by the millions for Ms. [00:57:21] Speaker 01: Stetson's client. [00:57:22] Speaker 01: If they want to do that in the marketplace, let them do it, but they should not be able to do it by virtue of rule 611, either because the regulatory text is clear or because they can't qualify for Kaiser because they flipped or because at a minimum, even if the de minimis exception exists, [00:57:38] Speaker 01: They didn't analyze it here in this order with respect to displayed prices. [00:57:42] Speaker 01: At a minimum, this court should vacate, remand with vacatur of that part of the order. [00:57:51] Speaker 01: And obviously we have not discussed today the remedy, but I think clearly this is the standard. [00:57:56] Speaker 01: If you're gonna remand, you should vacate. [00:58:01] Speaker 06: Thank you very much. [00:58:03] Speaker 06: Case is submitted.