The Eleventh Circuit decided one administrative law case of note in the second half of May. In Citadel Securities LLC v. SEC, a panel of Judges Rosenbaum, Lagoa, and Marcus unanimously denied a petition for review of the SEC’s approval of a new options exchange under the Securities Exchange Act of 1934. Among other things, the opinion deferred to the SEC on the existence of a problem, the effectiveness of the solution, and the scope of the SEC’s expertise.

Investors Exchange LLC (IEX) proposed a new options exchange that limits latency arbitrage in two ways. (Latency arbitrage is the practice of buying or selling at a favorable price using split-second differentials in access to information.) Specifically, IEX proposed to add 350 microseconds of delay for incoming orders using an “access delay” or “speed bump” of fiber optic cable. It also proposed to use software to detect price differentials across exchanges and cancel or reprice quotes. Citadel Securities LLC, a market maker and high-frequency trader, petitioned for review of the SEC’s approval of the new exchange.

As a preliminary matter, the case could be brought in the Eleventh Circuit because Citadel’s headquarters are in Miami. Many challengers of administrative action consider the Eleventh Circuit to be a more receptive environment than the D.C. Circuit (or the Seventh Circuit, where Citadel was previously located).

On the merits, the Eleventh Circuit first held that substantial evidence supported the SEC’s finding that latency arbitrage in options markets is a problem. The court relied on both comments from market participants and the SEC’s expertise. Citadel objected that the SEC’s experience was with latency arbitrage in equities markets, but the court deferred to the SEC on the scope of its expertise. Citadel also objected to the scarcity of supporting quantitative data, but the court held that neither the APA nor the Exchange Act required more empirical data.

Second, the Eleventh Circuit held that substantial evidence supported the SEC’s finding that the new exchange would reduce the problem of latency arbitrage. The court disagreed with Citadel’s argument that the SEC was required to consider data from the Consolidated Audit Trail (CAT), a database of securities transactions. The court again reasoned that the SEC does not need to provide extensive quantitative data, especially in the 90-day process for approving IEX’s proposal under the Exchange Act.

Third, the Eleventh Circuit held that quotations on the new exchange are “protected” and do not fall within the exception for “non-firm” orders. Without getting into the finer details of securities law, it is worth noting that the court declined to read “firm” in its more colloquial sense. It instead evaluated the meaning of “firm” under the SEC’s pre-existing Options Order Protection and Locked/Crossed Market Plan.

Fourth, the Eleventh Circuit held that the SEC reasonably concluded that the exchange will not “permit unfair discrimination between customers, issuers, brokers, or dealers.” 15 U.S.C. § 78f(b)(5). Among other things, the court again deferred to the SEC’s predictive judgment that the proposal would increase liquidity and provide indirect benefits for the market.

Fifth, the Eleventh Circuit held that the SEC reasonably concluded that the exchange would not “impose any burden on competition not necessary or appropriate in furtherance of the purposes” of the Exchange Act. 15 U.S.C. § 78f(b)(8). The court distinguished that requirement as narrower than the one in Section 2(b), applicable to SEC rulemakings. See 15 U.S.C. § 77b(b). The court also reasoned that the SEC need not assess less-intrusive alternatives when providing “a quick up-or-down answer.” The court further concluded that the SEC reasonably determined the exchange would increase competition. And the court concluded that the SEC reasonably determined that any burden was “necessary” and “appropriate.” On that last point, it deferred to the SEC’s prediction that the proposal would increase liquidity.