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Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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In the 

United States Court of Appeals 

For the Seventh Circuit ____________________

Nos. 14‐2912, 14‐3071

CITADEL SECURITIES, LLC, et al.,

Plaintiffs‐Appellants,

v.

CHICAGO BOARD OPTIONS EXCHANGE, INC., et al.,

Defendants‐Appellees.

____________________

Appeals from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 1:13‐CV‐05833 — Robert W. Gettleman, Judge.

____________________

ARGUED NOVEMBER 12, 2015 — DECIDED DECEMBER 11, 2015

____________________

Before BAUER, FLAUM, and MANION, Circuit Judges.

FLAUM, Circuit Judge. Plaintiffs Citadel Securities, LLC, et

al., sued defendants Chicago Board Options Exchange, Inc.,

et al., in Illinois state court, seeking to recover fees they claim

were improperly charged to and paid by plaintiffs to de‐

fendants under defendants’ “payment for order flow” pro‐

grams. Defendants removed the case to federal district court.

The district court dismissed the case for lack of subject mat‐

ter jurisdiction based on plaintiffs’ failure to exhaust admin‐

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2 Nos. 14‐2912, 14‐3071

istrative remedies. Plaintiffs appeal the district court’s dis‐

missal of the case as well as the denial of their motion to re‐

mand. We affirm.

I. Background

Defendants are national securities exchanges registered

with the U.S. Securities and Exchange Commission (“SEC”).1

They operate as self‐regulatory organizations (“SROs”) that

regulate markets in conformance with securities laws under

the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a et seq.

(1934) (“Exchange Act”). The Exchange Act requires ex‐

changes to adopt rules governing the conduct and admin‐

istration of the exchanges and their members. See 15 U.S.C.

§§ 78f(b), 78s(b). Specifically, the rules of the exchange must

“provide for the equitable allocation of reasonable dues,

fees, and other charges among its members and issuers and

other persons using its facilities.” § 78f(b)(4). The SEC has

broad authority to amend the rules of SROs. See § 78s(c).

Plaintiffs are securities firms and members of the defend‐

ant exchanges.2 They operate as “market makers” under the

exchanges’ rules. Market makers compete for customer or‐

der flow by displaying buy and sell quotations for particular

stocks.  

Between at least January 2004 and June 2011, each de‐

fendant charged “payment for order flow” (“PFOF”) fees.

                                                  1 Defendants are: Chicago Board Options Exchange, Inc.; Interna‐

tional Securities Exchange, LLC; NASDAQ OMX PHLX; NYSE ARCA,

Inc.; and NYSE MKT LLC.

2 Plaintiffs are: Citadel Securities, LLC; Group One Trading LP; Ro‐

nin Capital, LLC; Susquehanna Securities; and Susquehanna Investment

Group.

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Nos. 14‐2912, 14‐3071 3

PFOF is an arrangement by which a broker receives payment

from a market maker in exchange for sending order flow to

them. These fees are imposed to attract order flow to a mar‐

ket, thereby increasing liquidity in that market. Each de‐

fendant exchange imposes PFOF fees on a market maker

when a trade is made for a “customer”; however, these fees

are not imposed for proprietary “house trades,” where a

firm trades on its own behalf.

Defendants have adopted rules creating the PFOF pro‐

grams, as required under the Exchange Act. According to

the SEC, the rules creating the PFOF programs are “designed

to ensure that market makers that may trade with customers

on the exchange contribute to the cost of attracting that order

flow.” Competitive Developments in the Options Markets,

69 Fed. Reg. 6,124, 6,129 (Feb. 9, 2004).

We briefly note the origins of PFOF fees in order to place

this case in historical context. PFOF fees recently became

commonplace due to the advent of “multiple listing.” See id.

at 6,128–29. Until 1999, most actively traded options were

listed on only one exchange. Id. In 1989, the SEC adopted Ex‐

change Act Rule 19c‐5, which promoted the listing of options

on more than one exchange, enhancing competition among

options exchanges. Id. at 6,125. The SEC has noted that PFOF

“arrangements principally benefit intermediaries in the first

instance, which may or may not pass on those benefits to

their customers.” Id. at 6,128. The SEC has also expressed

concern that PFOF fees may create a conflict of interest be‐

tween exchanges’ own interests as profit‐making entities and

their regulatory responsibilities. Id. at 6,130.

Plaintiffs allege that between 2004 and 2011 defendants

charged PFOF fees on millions of orders not properly subject

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4 Nos. 14‐2912, 14‐3071

to those fees. They claim that a broker‐dealer—which re‐

mains unidentified, is referred to by the parties only as the

“Subject Firm,” and is not a defendant in this case—

incorrectly marked plaintiffs’ stock option orders, resulting

in payment of PFOF fees in contravention of various ex‐

change rules. Upon discovering the Subject Firm’s errors,

defendants entered into stipulations and letters of consent

whereby the Subject Firm paid them penalties and all previ‐

ously uncollected transaction fees due on non‐customer or‐

ders. Plaintiffs seek restitution or recovery from defendants

of all fees that were allegedly mischarged.  

Plaintiffs sued defendants in the Circuit Court of Cook

County, Illinois. Defendants then removed the case to feder‐

al district court. Plaintiffs moved to remand to state court,

claiming that no federal question was presented. The district

court denied plaintiffs’ motion to remand, finding that juris‐

diction under § 78aa was proper.

Defendants then moved to dismiss for: lack of subject

matter jurisdiction based on failure to exhaust administra‐

tive remedies, absolute immunity, lack of private right of ac‐

tion, and failure to state a claim. On August 4, 2014, the dis‐

trict court found that plaintiffs had failed to exhaust their

administrative remedies and dismissed the case without

prejudice for lack of subject matter jurisdiction. Plaintiffs

appeal.

II. Discussion

A. Failure to Exhaust Administrative Remedies

We first turn to plaintiffs’ argument that the district court

erred in dismissing the suit. In general, we review de novo a

district court’s grant of a motion to dismiss for lack of sub‐

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Nos. 14‐2912, 14‐3071 5

ject matter jurisdiction. Shawnee Trail Conservancy v. U.S.

Dep’t of Agric., 222 F.3d 383, 385 (7th Cir. 2000). However, the

district court based its dismissal on plaintiffs’ failure to ex‐

haust administrative remedies. We have held that “the deci‐

sion to require exhaustion as a prerequisite to bringing suit

is a matter within the discretion of the trial court and may be

disturbed on appeal only when there has been a clear abuse

of discretion.” Id. at 389 (citation and internal quotation

marks omitted). We “accept as true all well‐pleaded factual

allegations and draw reasonable inferences in favor of the

plaintiff[s].” Capitol Leasing Co. v. F.D.I.C., 999 F.2d 188, 191

(7th Cir. 1993).

The district court observed that the Exchange Act pro‐

vides a comprehensive administrative review process for de‐

cisions rendered by exchanges. The court explained that fi‐

nal rulings issued by an exchange are subject to administra‐

tive review by the SEC. Looking to the terms of the statute,

the district court also noted that an aggrieved party dissatis‐

fied with the SEC’s determination can obtain further review

from a federal appellate court. Ultimately, the district court

concluded that plaintiffs had failed to demonstrate that they

have no meaningful administrative remedy.

Plaintiffs present two main arguments on appeal. First,

they argue that because defendants acted outside of their

regulatory function and solely in their private capacity as

for‐profit entities, there is no need for exhaustion of reme‐

dies before the SEC. Second, plaintiffs argue that exhaustion

is not required because the SEC cannot provide adequate re‐

lief.  

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6 Nos. 14‐2912, 14‐3071

1. Application of the Exhaustion Requirement

We agree with the district court that plaintiffs seek to en‐

force defendants’ own rules promulgated under the Ex‐

change Act. Plaintiffs claim that PFOF fees serve purely a

private function and are not created pursuant to any regula‐

tory authority, thus the exhaustion requirement does not

apply. We are not convinced by this argument. Section

78s(h)(1) authorizes the SEC to “censure or impose limita‐

tions upon the activities, functions, and operations of” a na‐

tional security exchange if it “finds, on the record after no‐

tice and opportunity for hearing, that [the exchange] has vio‐

lated or is unable to comply with any provision of this chap‐

ter, the rules or regulations thereunder, or its own rules or

without reasonable justification or excuse has failed to en‐

force compliance ... .” Id. (emphasis added).

Given that the plain language of the Exchange Act calls

for SEC review of plaintiffs’ allegations of improper PFOF

fees, the district court did not abuse its discretion in holding

that plaintiffs are required to exhaust administrative reme‐

dies. There is little question that the PFOF fees are imposed

pursuant to defendants’ own rules: Defendants announced

the PFOF fees as “proposed rule changes” published in the

Federal Register.3 The fees became effective upon an‐

nouncement and remained in place because the SEC did not

take any action to abrogate them. See § 78s(b)(3)(A)(ii). Con‐

                                                  3 Exchanges may use rules to impose fees under the Exchange Act.

§ 78f(b)(4) (“The rules of the exchange provide for the equitable alloca‐

tion of reasonable dues, fees, and other charges among its members and

issuers and other persons using its facilities.”).  

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Nos. 14‐2912, 14‐3071 7

sequently, PFOF fees are rules with which defendants must

comply, subject to SEC enforcement.

Moreover, we are not persuaded by the case law plain‐

tiffs present to show that rules imposing PFOF fees fall out‐

side of defendants’ regulatory function. Plaintiffs rely heavi‐

ly on In re Facebook, Inc., IPO Sec. & Derivative Litig., 986 F.

Supp. 2d 428, 452–53 (S.D.N.Y. 2013), where the district court

acknowledged changes wrought by the widespread trans‐

formation of financial exchanges from non‐profit mutual

companies to for‐profit, publicly listed organizations (known

as “demutualization”). Specifically, the court identified the

potential for conflict between exchanges’ profit motive and

their regulatory duties. Id. at 453. The Facebook court raised

important concerns about the application of “blanket protec‐

tion for exchanges when they fail to exercise due care in

their pursuits of profit,” but it did so in the context of ques‐

tions raised about SRO immunity. Id. at 453–54. The Facebook

court held that the owners and officers of a stock exchange

were not entitled to SRO immunity from various investor

claims. Id. at 454.

Defendants correctly note that immunity is a different is‐

sue than administrative exhaustion. The question of SRO

immunity is focused on the nature of defendants’ action. By

contrast, exhaustion relates to the reach of the SEC’s authori‐

ty to review the action. Plaintiffs attempt to import the im‐

munity analysis and apply it in the exhaustion context. The

immunity inquiry asks whether the defendant’s conduct is

primarily regulatory or private in nature. But the exhaustion

inquiry is jurisdictional rather than content‐based. What

matters for exhaustion is not the nature of defendants’ ac‐

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8 Nos. 14‐2912, 14‐3071

tion, but whether the action involves defendants’ own rules

pursuant to the Exchange Act.

Plaintiffs also cite Weissman v. Nat’l Ass’n of Sec. Dealers,

Inc., 500 F.3d 1293, 1299 (11th Cir. 2007) (en banc), for the

proposition that an exchange may be sued in court for pri‐

vate conduct. However, as in Facebook, Weissman examines

the regulatory/private distinction in the context of immunity

rather than exhaustion. Id. at 1295–96. Thus, the logic of

Weissman does not excuse defendants’ obligation to exhaust

SEC remedies before bringing suit in federal district court.

Finally, plaintiffs rely on an improper reading of an un‐

reported case, Opulent Fund v. Nasdaq Stock Mkt., Inc., C‐07‐

03683 RMW, 2007 WL 3010573, at *5 (N.D. Cal. Oct. 12,

2007), to argue that the exhaustion of remedies is not re‐

quired where a complaint targets private activity. Plaintiffs’

interpretation of Opulent not only conflates the immunity

and exhaustion analyses, but also conflicts with the statutory

language of § 78s(h)(1). Section 78s(h)(1) states that the SEC’s

jurisdiction covers claims against an SRO for violating “its

own rules”; the regulatory or private nature of the action

does not determine the SEC’s jurisdictional reach. What mat‐

ters is whether defendants’ are operating under their own

rules, as in the case at hand.

2. Failure to Waive the Exhaustion Requirement

We also reject plaintiffs’ argument that exhaustion is un‐

necessary because administrative relief is unavailable. Gen‐

erally, a district court is unable to waive a statutorily‐

mandated exhaustion requirement. See Shawnee Trail Con‐

servancy, 222 F.3d at 389. However, a court may waive the

exhaustion requirement where exhaustion is futile. See Smith

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Nos. 14‐2912, 14‐3071 9

v. Blue Cross & Blue Shield United of Wisconsin, 959 F.2d 655,

658–59 (7th Cir. 1992). The futility exception is limited to sit‐

uations where the attempt to exhaust administrative reme‐

dies would be useless or inadequate to prevent irreparable

harm. See id. at 659 (“In order to come under the futility ex‐

ception, [plaintiffs] must show that it is certain that their

claim will be denied on appeal, not merely that they doubt

an appeal will result in a different decision.”); PennMont Sec.

v. Frucher, 586 F.3d 242, 246 (3rd Cir. 2009) (“[An] ‘extraordi‐

nary’ exception[] to the exhaustion requirement [is] ... ‘when

the administrative procedure is clearly shown to be inade‐

quate to prevent irreparable injury ... .’” (citation omitted));

Tesoro Refining and Marketing Co. v. F.E.R.C., 552 F.3d 868, 874

(D.C. Cir. 2009) (“The futility exception is ... limited to situa‐

tions when resort to administrative remedies [would be]

clearly useless.” (alteration in original) (internal citation and

quotation marks omitted)).

Plaintiffs have not clearly shown that the SEC’s adminis‐

trative procedure is futile or inadequate to prevent irrepara‐

ble injury. While there is no obvious path to the monetary

compensation plaintiffs seek, it is impossible to say whether

relief is available since plaintiffs have made no attempt to

bring the matter before the SEC. We can envision situations

in which reliance on administrative remedies would be

clearly futile and SEC review might not be required, but

plaintiffs have not convinced us that this is such a case.

In its current form, the Exchange Act provides a range of

administrative remedies for those aggrieved by an ex‐

change’s action. Section 78s(h)(1) gives the SEC authority to

“censure or impose limitations upon the activities, functions,

and operations” of an exchange, although there is no men‐

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10 Nos. 14‐2912, 14‐3071

tion of damages or restitution. Other sections of the Ex‐

change Act explicitly provide for monetary penalties. For

instance, § 78u‐2 gives the SEC authority to assess monetary

penalties in proceedings instituted pursuant to §§ 78o(b)(4),

78o(b)(6), 78o‐6, 78o‐4, 78o‐5, 78o‐7, or 78q‐1. And

§ 78u(d)(3) gives the SEC general authority to pursue mone‐

tary penalties in civil actions. In other words, monetary

compensation is at least a possibility.

In sum, the district court did not abuse its discretion in

dismissing plaintiffs’ case for failure to exhaust administra‐

tive remedies.  

3. Dismissal Without Prejudice

On cross‐appeal, defendants argue that the district court

should have dismissed plaintiffs’ suit with prejudice for

three independently sufficient reasons: absolute immunity,

preemption of claims, and failure to state a claim under Illi‐

nois law. Defendants ask us to modify the judgment to make

the dismissal of this suit with prejudice.  

We decline to do so. In dismissing for lack of subject mat‐

ter jurisdiction, the district court properly elided these three

arguments. A dismissal for lack of subject matter jurisdiction

is not a decision on the merits, and thus cannot be a dismis‐

sal with prejudice. See, e.g., Murray v. Conseco, Inc., 467 F.3d

602, 605 (7th Cir. 2006). Because we affirm the district court’s

dismissal for lack of subject matter jurisdiction, we will not

proceed to the merits of the case.

B. Motion for Remand

Plaintiffs’ final argument on appeal is that removal was

improper and we should remand to state court. We review

de novo a district court’s decision regarding the propriety of

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Nos. 14‐2912, 14‐3071 11

removal. Alexander v. Mount Sinai Hosp. Med. Ctr., 484 F.3d

889, 891 (7th Cir. 2007).

According to plaintiffs, PFOF programs serve purely a

private function and are not created pursuant to any regula‐

tory authority delegated by the SEC. Therefore, no federal

regulatory interest is at issue. We disagree and affirm the

district court’s denial of plaintiffs’ motion to remand.

A state claim may be removed to federal court only if the

federal court has original jurisdiction, unless Congress ex‐

pressly provides otherwise. 28 U.S.C. § 1441(a); Rivet v. Re‐

gions Bank of Louisiana, 522 U.S. 470, 474 (1998). “[T]he pres‐

ence or absence of federal‐question jurisdiction is governed

by the ‘well‐pleaded complaint rule,’ which provides that

federal jurisdiction exists only when a federal question is

presented on the face of the plaintiff’s properly pleaded

complaint.” Rivet, 522 U.S. at 475 (quoting Caterpillar Inc. v.

Williams, 482 U.S. 386, 392 (1987)); see also 28 U.S.C. § 1331. A

case may not be removed on the basis of a federal defense.

Rivet, 522 U.S. at 475. Additionally, “a plaintiff may not de‐

feat removal by omitting to plead necessary federal ques‐

tions.” Id. (citation and internal quotation marks omitted).

“If a court concludes that a plaintiff has ‘artfully pleaded’

claims in this fashion, it may uphold removal even though

no federal question appears on the face of the plaintiff’s

complaint. The artful pleading doctrine allows removal

where federal law completely preempts a plaintiff’s state‐

law claim.” Id. (citation omitted).

The district court properly found that removal was ap‐

propriate based on § 78aa, which gives district courts “exclu‐

sive jurisdiction of violations of this chapter or the rules and

regulations thereunder, and of all suits in equity and actions

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12 Nos. 14‐2912, 14‐3071

at law brought to enforce any liability or duty created by this

chapter or the rules and regulations thereunder.” As dis‐

cussed above, plaintiffs’ complaint alleges that defendants

violated their own rules—rules they are bound to comply

with under § 78s(g)(1)—by improperly charging PFOF fees.

Thus, removal was proper because the plain language of the

Exchange Act establishes that federal courts have exclusive

jurisdiction over actions seeking to interpret and enforce

compliance with exchange rules or the Act itself.

The district court correctly determined that this case im‐

plicates a federal interest sufficiently substantial to establish

federal subject matter jurisdiction. See, e.g., D’Alessio v. N.Y.

Stock Exch., Inc., 258 F.3d 93, 101 (2d Cir. 2001) (finding fed‐

eral subject matter jurisdiction where an exchange failed to

perform its statutory duty under federal law); Sparta Surgical

Corp. v. Nat’l Ass’n of Sec. Dealers, Inc., 159 F.3d 1209, 1212

(9th Cir. 1998) (holding that “although [plaintiff’s] theories

are posited as state law claims,” their viability depended on

whether the SRO’s “rules were violated,” thereby triggering

the exclusive jurisdiction provision of § 78aa). We therefore

affirm the district court’s denial of plaintiffs’ motion to re‐

mand to state court.

III. Conclusion

For the foregoing reasons, we AFFIRM the judgment of the

district court.

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