What Is a D-Limit Order? 17 Things to Know as Citadel Securities Heads to Court.

Citadel Securities is heading to court today, but it’s not under investigation. The largest market-maker of Robinhood (NASDAQ:HOOD) has caught its fair share of flack from the GameStop (NYSE:GME) fallout, but now it’s on the offensive, taking on the Securities and Exchange Commission (SEC) in a court battle of its own making. It claims the SEC is failing to understand the burdens and adverse implications of D-Limit orders, which it is approving for implementation on the market. But, for many investors, this case is leading to more questions than it’s answering; namely, what is a D-Limit order?

A phone screen displaying the Citadel logo.
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D-Limit orders are the subject of a contentious new court battle between the SEC and Citadel Securities. The company is taking on the government agency as a result of the SEC’s approval of D-Limit orders for use in the stock market; this, of course, is something that Citadel doesn’t want. As such, it’s aiming to plead its case to a judge as to why the SEC is in the wrong. And, it’s lauding itself as a protector of retail investors in order to make that case — a claim that many retail investors are scoffing at. Let’s take a look at the many dimensions of this case as it makes its way to court today.

“What Is a D-Limit Order?” and Other Questions From the Citadel Lawsuit

  • To better understand D-Limit orders, it’s important to first know what a limit order is. A limit order is a stock order type that puts limits on the price at which a trade executes. A buyer can set a limit order to buy stock when it reaches a specified price. A seller can do the same with sales.
  • With limit orders, traders can be sure their trades will execute only when a stock’s price is satisfactory. Sellers will sell only when a stock climbs to a specified high or higher; buyers only buy when a stock dips to a specified low or lower. This gives investors more control over the execution prices of their trades.
  • Now, a D-Limit order is a new type of order, proposed by the Investors Exchange in early 2020. D-Limit orders utilize artificial intelligence (AI), which uses a robust set of qualifying variables to predict if a stock’s price will change. If the AI predicts a stock price will move unfavorably against a trader’s limit order, it will adjust the limit order’s execution price to be outside of the predicted price change’s range.
  • The SEC approved D-Limit orders at the beginning of October, allowing exchanges to adopt the order-type for widespread use.
  • D-Limit orders have support by those claiming it will help retail investors to level to playing field with institutional investors; Wall Street traders have much more robust technology at hand for trading. This order type will put some of that tech in retail traders’ hands.
  • Another major reason they are highly regarded is that they remove market arbitrage by market makers. Through Payment for Order Flow (PFOF), e-trading platforms send large swaths of trades to a market maker compensation. Market makers then execute these trades at a clearing house of their choice.
  • Market arbitrage, then, is a form of predatory investing enabled by PFOF. Traders buy stocks from one exchange while selling it on another that offers a higher price, then pocketing the difference.
  • The market makers can do this with retail investors trades; this then incentivizes market makers to ignore the best execution for retail investors in favor of earning more money through arbitrage. Of course, D-Limit orders can eliminate this by utilizing an unbiased AI model to serve retail traders’ best interests.
  • However, there are some concerns — mostly from institutional investors — which are culminating with Citadel’s suit against the SEC.
  • One such concern is that if D-Limit orders were widely adopted, the algorithm’s activity could inadvertently move an entire stock’s quote price.

Citadel’s Suit Against the SEC Has Investors Questioning the Firm’s Motives

  • Citadel’s argument against the SEC’s ruling is that the committee “failed to properly consider the costs and burdens imposed by this proposal that will undermine the reliability of our markets.” Now, it’s taking the SEC to court in a lawsuit set to begin today.
  • Of course, skepticism is rampant over Citadel’s motives; they claim in the suit they want to protect the best interests of these retail traders. It’s hard to blame this skepticism, too, as Citadel is the largest market maker of retail investments. It stands to lose the most from widespread implementation of D-Limits.
  • The company is already embroiled in a slew of lawsuits regarding the fallout from Robinhood’s halt of GME trading in January. All of these suits have put Citadel on the defensive, fighting to prove that it was not a bad actor through the GME event. Many remain unconvinced that Citadel actually cares about retail investors’ best interests.
  • Most recently, a suit is alleging that Citadel conspired with Robinhood to halt trading.
  • While the SEC’s recent report on GME seemed to absolve Robinhood and Citadel from these theories, questions yet remain about the cause of the trading halt.
  • Even still, while Citadel might not be under suspicion of causing the trading halt, many investors believe it to still be a perpetrator of market arbitrage. The company handles 37% of all retail trades, most of which come through Robinhood’s PFOF model. Of course, the relationship and the great controversy puts the company in a very bad light regardless of whether or not it ultimately sees punishment in court for bad actions.
  • Naturally, these investors have a right to skepticism, and they are exercising that right; thousands of tweets about the suit today voice investors’ massive skepticism over Citadel’s position in this suit. Rather than fighting for retail investors, critics think Citadel is using this claim as a cover-up for its “real” motive; they think Citadel doesn’t want D-Limits because it doesn’t want to lose out on arbitrage opportunities.

On the date of publication, Brenden Rearick did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Article printed from InvestorPlace Media, https://investorplace.com/2021/10/what-is-a-d-limit-order-17-things-to-know-as-citadel-securities-heads-to-court/.

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