Judge Amos L. Mazzant let the case move forward, saying it’s plausible the merger worsened consolidation within an already tight-knit financial sector, curtailing competition among brokers that kept trading costs in check through widespread “price improvement” for ordinary traders.
“Allegations of this nature, which indicate that a transaction has resulted in increased market concentration, are sufficient,” he wrote. “Whether divestiture or another form of injunctive relief is appropriate in this case will ultimately turn on a balancing of the equitable principles.”
The company’s defenses rely on fact-intensive arguments that can’t be resolved until later in the case, the judge said.
A spokesperson for Schwab, in a statement to Bloomberg Law, said Monday that the company “will continue to aggressively seek the dismissal of this meritless case.”
“Allegations are not facts,” the firm said. “We look forward to demonstrating the value and appropriateness of our approach in court. Any suggestion that the combination of these two client-centric firms has led to less favorable outcomes is simply not true.”
The dispute concerns changes to the retail brokerage industry in recent years as fintech firms developing complex algorithms—acting as market makers—drive a shift from a commission-based business model to one dependent on sales of trading data from downstream brokerages like Schwab.
Schwab and some of its rivals now make the bulk of their money by selling that “retail order flow” to upstream companies like Citadel Securities and
The fintech firms allegedly compete among one another by trying to offer larger payments for the order flow, which the brokerages use to fund rebates for investors. By capturing roughly 50% of the market through the TD Ameritrade merger, Schwab has upended those mechanisms, the lawsuit says.
Mazzant, writing for the US District Court for the Eastern District of Texas, gave those claims a green light Feb. 24. He rejected the idea that the traders leading the case had “contrived” a market definition based on retail order flow so they could attribute a larger share to Schwab than it actually has.
“Plaintiffs allege sufficient facts to support the assertion that the retail order flow market is an economically significant submarket of the larger market for brokerage services,” the judge wrote. He cited allegations about totally different pricing mechanisms used by commission-based brokerages.
Mazzant also noted that although the merger received antitrust clearance in 2020, and “courts have typically ordered divestiture in suits brought by the government,” private antitrust plaintiffs can seek “retrospective relief that unwinds a completed transaction.”
That rule has been on the books for decades, but no court had ever ordered major divestitures in a private antitrust case until 2021, when the US Court of Appeals for the Third Circuit issued a first-of-its-kind ruling in a case involving doormakers.
Bathaee Dunne LLP and Capshaw DeRieux LLP are counsel for the traders. Schwab is represented by Wilmer Cutler Pickering Hale & Dorr LLP and Gillam & Smith LLP.
The case is Corrente v. Charles Schwab Corp., E.D. Tex., No. 22-cv-470, 2/24/23.
