Retail investors hit Charles Schwab Corp. with federal antitrust claims in Texas on Thursday, seeking to unwind its merger with TD Ameritrade over claims that the $26 billion deal slashed rebates and discounts for traders by drastically reducing competition among brokerages.
The lawsuit accuses Schwab of capturing half of the market for “retail order flow”—trading data that powers the industry by serving as the feedstock for “supercharged” machine learning models—through a transaction that significantly worsened concentration of an already tight-knight financial sector.
Both companies used to make money by charging retail investors commissions for stock transactions. But they stopped doing so in 2019, adopting the business model of industry newcomer Robinhood, which earns revenue solely by selling individual investors’ stock trade orders, known as “retail order flow,” to market makers.
With TD Ameritrade, Charles Schwab now serves more than 24 million brokerage accounts with $5 trillion in client assets.
The companies received 51% of all order flow payments made by market makers to retail brokerages in 2020 and that dominance continued, according to the complaint.
“The companies together maintained approximately half of the order flow in 2021 as well, with TD Ameritrade at about 39% of the $3.6 billion in order flow paid in 2021 and Schwab at 9%. While order flow payments grew approximately 32% from 2020 to 2021, the combined companies maintained their combined share of approximately half of those payments,” the lawsuit states.
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