United States Court of Appeals

For the Eighth Circuit

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No. 18-3689

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Roderick Ford,

lllllllllllllllllllllPlaintiff - Appellee,

v.

TD Ameritrade Holding Corporation; TD Ameritrade, Inc.; Frederic J. Tomczyk,

lllllllllllllllllllllDefendants - Appellants.

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Securities Industry and Financial Markets Association; Chamber of Commerce of

the United States of America,

lllllllllllllllllllllAmici on Behalf of Appellants,

Better Markets, Inc.,

lllllllllllllllllllllAmicus on Behalf of Appellee.

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Appeal from United States District Court 

for the District of Nebraska - Omaha

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 Submitted: September 23, 2020

Filed: April 23, 2021

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Before COLLOTON, GRUENDER, and GRASZ, Circuit Judges. 

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COLLOTON, Circuit Judge.

A customer of TD Ameritrade, Inc., sued the company and two other defendants

for securities fraud in the District of New Jersey. He purported to sue on behalf of

himself and all similarly-situated customers of TD Ameritrade. The district court in

New Jersey later appointed Roderick Ford as lead plaintiff, and the court then

transferred the action to the District of Nebraska. The district court in Nebraska

certified a class under Federal Rule of Civil Procedure 23(b)(3), and the defendants

appeal that order. We conclude that the proposed class does not satisfy the

requirements of Rule 23, and we therefore reverse.

I.

TD Ameritrade offers brokerage services to retail investors. The company is the

nation’s third largest discount brokerage, serving over six million clients. TD

Ameritrade customers can trade stocks by submitting orders through the company’s

online platform. The company itself does not execute customer orders, but instead

routes orders to trading venues (such as a stock exchange) for fulfillment. The

company generally transmits orders using a computerized routing system.

Ford was appointed in 2014 as lead plaintiff for a group of investors who

purchased and sold securities through TD Ameritrade between 2011 and 2014. He

alleges that TD Ameritrade’s order routing practices violate the company’s “duty of

best execution” by systematically sending customer orders to trading venues that pay

the company the most money, rather than to venues that provide the best outcome for

customers. The duty of best execution requires that brokers “use reasonable efforts to

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maximize the economic benefit to the client in each transaction.” Newton v. Merrill

Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 173 (3d Cir. 2001) (internal

quotation omitted).

Ford maintains that TD Ameritrade caused customers to suffer economic loss

by leaving orders unfilled, filling orders at a sub-optimal price, and filling orders in a

manner that adversely affected performance after execution. The complaint asserts that

TD Ameritrade, its parent company, and its chief executive officer, Frederic J.

Tomczyk, violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b),

and the Securities and Exchange Commission’s Rule 10b-5. 17 C.F.R. § 240.10b-5. 

The complaint also asserts that Tomcyzk is jointly and severally liable as a “controlling

person” of the company under § 20(a) of the Act. 15 U.S.C. § 78t(a).

Ford moved for class certification in 2017. A magistrate judge concluded that

the proposed class did not satisfy the requirements of Rule 23(b)(3) and recommended

denying certification. The judge reasoned that determining whether each TD

Ameritrade customer suffered economic loss as a result of the company’s order routing

practices would entail an order-by-order inquiry, and that common issues thus did not

predominate over individual questions.

On review of the recommendation, however, the district court determined that

Ford’s expert had developed an algorithm that could solve the predominance problem

by making automatic determinations of economic loss for each customer. The court

certified a class consisting of “[a]ll clients of TD Ameritrade between September 15,

2011 and September 15, 2014 who placed orders that did not receive best execution,

in connection with which TD Ameritrade received either liquidity rebates or payment

for order flow, and who were thereby damaged.”

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This court granted the defendants permission to appeal the class certification

order. See Fed. R. Civ. P. 23(f). We review the order for abuse of discretion. IBEW

Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775, 779 (8th Cir. 2016).

II.

A.

To justify certification of a class, plaintiffs must meet all of the requirements of

Federal Rule of Civil Procedure 23(a) and satisfy one of the three subsections of Rule

23(b). The district court certified a class based on Rule 23(b)(3), which requires that

“questions of law or fact common to class members predominate over any questions

affecting only individual members, and that a class action is superior to other available

methods for fairly and efficiently adjudicating the controversy.”

“An individual question is one where ‘members of a proposed class will need

to present evidence that varies from member to member,’ while a common question is

one where ‘the same evidence will suffice for each member to make a prima facie

showing [or] the issue is susceptible to generalized, class-wide proof.’” Tyson Foods,

Inc. v. Bouaphakeo, 577 U.S. 442, 453 (2016) (quoting 2 William B. Rubenstein,

Newberg on Class Actions § 4:50, at 196-97 (5th ed. 2012)). If the plaintiffs’ method

of proving their claim would “include individualized inquiries that cannot be addressed

in a manner consistent with Rule 23, then the class cannot be certified.” Harris v.

Union Pac. R.R. Co., 953 F.3d 1030, 1035 (8th Cir. 2020) (internal quotation

omitted).

Ford alleges that TD Ameritrade violated § 10(b) of the Securities Exchange Act

and Rule 10b-5. We do not address the merits at this stage, but we do consider the

nature of the underlying claim to determine its suitability for class certification. See

Harris, 953 F.3d at 1033. Section 10(b) forbids the use, in connection with the

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purchase or sale of a security, of “any manipulative or deceptive device or contrivance

in contravention of” regulations promulgated by the SEC for the protection of

investors. 15 U.S.C. § 78j(b). The SEC promulgated Rule 10b-5 to enforce § 10(b). 

Rule 10b-5 prohibits making an untrue statement of material fact or omitting to state

a material fact in connection with the purchase or sale of a security. 17 C.F.R.

§ 240.10b-5(b). It also forbids engaging in “any act, practice, or course of business

which operates or would operate as a fraud or deceit upon any person, in connection

with the purchase or sale of any security.” Id. § 240.10b-5(c).

The Supreme Court has “long recognized an implied private cause of action to

enforce [§ 10(b)] and its implementing regulation.” Halliburton Co. v. Erica P. John

Fund, Inc., 573 U.S. 258, 267 (2014). To recover damages for violations of § 10(b)

and Rule 10b-5, a plaintiff must prove “(1) a material misrepresentation or omission

by the defendant; (2) scienter; (3) a connection between the misrepresentation or

omission and the purchase or sale of a security; (4) reliance upon the misrepresentation

or omission; (5) economic loss; and (6) loss causation.” Amgen Inc. v. Conn. Ret.

Plans & Tr. Funds, 568 U.S. 455, 460-61 (2013) (internal quotation omitted).

B.

This case involves a dispute about a broker’s compliance with its duty of best

execution. Best execution cases differ from typical securities fraud cases under Rule

10b-5, where the alleged fraud directly affects the price of a security. See Newton, 259

F.3d at 173, 179-80. When a broker’s fraud directly affects the price of a security, the

customer trading in that security in reliance on the broker’s representation can easily

demonstrate that, but for the broker’s fraud, the customer’s trade would have executed

at a more favorable price. See id. at 180.

Here, by contrast, the economic loss allegedly caused by TD Ameritrade’s order

routing practices is “the difference between the price at which [customers’] trades were

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executed and the ‘better’ price allegedly available from an alternative trading source.” 

Id. at 178. To justify class certification, Ford must show that he can establish this type

of economic loss for a class of plaintiffs in a manner consistent with the predominance

requirement of Rule 23.

Ford’s expert proposes to analyze “hundreds of millions of data points” through

an algorithm. The algorithm would assess execution quality by using class trading

history data provided by TD Ameritrade and data about the state of the market at the

time of each trade. The expert shared the “specification” and “logic” of his proposed

algorithm with the parties and the court, but he has not disclosed the software code he

proposes to use for automating the analysis.

In Newton, the Third Circuit affirmed the denial of class certification in a best

execution case. 259 F.3d at 162. The court observed that “[w]hether a class member

suffered economic loss from a given securities transaction would require proof of the

circumstances surrounding each trade, the available alternative prices, and the state of

mind of each investor at the time the trade was requested.” Id. at 187. The alleged

injuries arose out of the execution of “hundreds of millions of trades.” Id. at 190. 

Because “[d]etermining which class members were economically harmed would

require an individual analysis into each trade and its alternatives,” the Third Circuit

concluded that individual questions were “overpowering.” Id. at 189. We find

Newton’s reasoning persuasive despite Ford’s attempts to distinguish it.

Ford contends that Newton is inapposite because it involved different

technology. In Newton, the plaintiffs argued that their expert could “devise a formula

for calculating injury and damages.” Id. at 191. Ford maintains that his expert has

already developed an advanced algorithm that can calculate injury and damages on a

class-wide basis, and that the inquiry can be completed upon discovery of class-wide

trading history. As such, Ford argues that we need not share Newton’s reluctance to

“rely on a formulaic nostrum given the consequences if it fails to meet expectations.” 

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Id. Even with the proposed algorithm, however, we conclude that determining

economic loss in this case entails individualized inquiry inconsistent with the

predominance requirement of Rule 23.

To succeed on the merits of his claim, Ford must show that TD Ameritrade’s

order routing practices caused its customers to suffer economic loss. See Amgen, 568

U.S. at 460-61. This requirement derives from the “standard rule of tort law that the

plaintiff must allege and prove that, but for the defendant’s wrongdoing, the plaintiff

would not have incurred the harm of which he complains.” Newton, 259 F.3d at 177

(internal quotation omitted).

Ford’s expert proposes to “establish that a ‘better’ price was obtainable for each

executed trade,” id. at 178, by comparing the trade’s actual price with the National

Best Bid and Offer (NBBO) price. The NBBO represents the highest price a buyer

was willing to pay, and the lowest price a seller was willing to accept, for a particular

stock at a given time. But sometimes a trade fails to execute at the NBBO price

through no fault of the broker. For example, volatile or otherwise unusual market

conditions can prevent a trade from executing at that price. The parties’ experts agree

that certain transactions must be excluded from the algorithm’s analysis to account for

instances where TD Ameritrade could not have prevented execution at a price inferior

to the NBBO.

The parties’ experts disagree, however, about which transactions should be

excluded. Ford argues that this disagreement is unresolved only because TD

Ameritrade successfully moved to limit discovery of class-wide trading data. Once

discovery is complete, he contends, he will be able to identify all necessary exclusions.

The process will not be that simple. Ford’s expert explains that third-party

companies provide historical stock market information that identifies periods when

stocks were traded during unusual market conditions, and argues that his algorithm can

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filter out unusual market conditions using these data. But TD Ameritrade’s expert

maintains that not all relevant unusual market conditions are recorded in these market

data, and that others must be identified on a case-by-case basis. As one of Ford’s

experts acknowledged, there is no definitive list of unusual market conditions that

account for transactions that depart from the best available price. As a result, the

algorithm’s use of published market data will not identify all legitimate exclusions, and

the experts will have to bring their own judgment to bear to identify further exclusions

on a trade-by-trade basis. A trier of fact will then have to resolve these disputes

through individualized determinations about the appropriateness of particular

exclusions.

Nor do advances in technology render “the state of mind of each investor at the

time [a] trade was requested” irrelevant to the economic loss determination. See

Newton, 259 F.3d at 187. Consider a trader who places two orders to buy shares of a

stock, one that he cancels before it is executed, and a second that is identical to the

first, but executed at a better price than would have applied to the first order. Even if

he canceled the first trade because of a delay in execution caused by TD Ameritrade’s

order routing practices, whether the cancellation caused economic loss depends on the

trader’s strategy. If he intended the second order to replace the canceled one, then he

is better off than if his first order had been executed. But if he would have placed the

second order even if the first order had been executed, then he might be worse off,

because he will have fewer shares available to sell for a profit if the price of the stock

later goes up. Ford’s algorithm cannot account for each customer’s trading strategy.

We conclude that despite advances in technology, individual evidence and

inquiry is still required to determine economic loss for each class member. See id. at

187-88. Advanced computing power can expedite that determination, but it cannot

change its underlying nature by converting individual evidence into common evidence. 

In this case, the prevalence of these individualized inquiries precludes class

certification under Rule 23(b)(3).

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Another concern with predominance is the nature of the trading conduct at issue. 

In Newton, the plaintiffs challenged the execution of orders at the NBBO price on the

ground that their broker failed to investigate whether the orders could have been

executed at more favorable prices on alternative trading systems. See 259 F.3d at 169-

70. In affirming the denial of certification, the court reasoned that “the NBBO listed

price may or may not have provided a class member with the best price,” depending

on the facts of each trade. Id. at 180. The court thus declined to presume economic

loss across the class, and it was unpersuaded that the plaintiff’s proposed formula

could determine economic loss for each class member without an array of individual

inquiries. Id. at 180-81, 187-88.

Ford attempts to distinguish Newton on the ground that TD Ameritrade executed

orders at prices inferior to the NBBO price when the orders could have been executed

at the NBBO price. He argues that this practice is inconsistent with the duty of best

execution. His expert’s analysis of a limited set of Ford’s own trades, however,

revealed that a substantial majority were executed at a price better than or equal to the

NBBO price. The economic loss analysis for these trades does not differ from Newton. 

And insofar as Ford suggests that execution of other trades at prices inferior to the

NBBO price necessarily results in economic loss, we disagree. There are

circumstances in which a trade legitimately might execute at a price inferior to the

NBBO price, such as when the order size exceeds the number of shares available at the

NBBO price at the time of the order. As a result, the price that a class member

received on trades executed at prices inferior to the NBBO price “may or may not have

provided a class member with the best price,” depending on the facts of each trade. 

Id. at 180. Assessing the relevant facts of each trade requires individualized inquiries.

Ford argues that a district court in New York approved use of a similar

algorithm in a best-execution class action after Newton. In In re NYSE Specialists Sec.

Litig., 260 F.R.D. 55 (S.D.N.Y. 2009), the court certified a class in a securities fraud

case and approved the use of an algorithm to prove economic loss. Id. at 80. The type

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of securities fraud at issue involved specialists using their knowledge of impending

customer orders to trade ahead of those orders for the benefit of their own accounts. 

Id. at 64. To measure the resulting economic harm to the customers, the finder of fact

was required to match customers’ orders with specific trades made by the specialists. 

See id. at 66-67. The next step was to compare the outcome that customers received

with the outcome they would have received but for the specialists’ alleged misconduct. 

See id. at 80.

That an algorithm could perform the limited matching function in NYSE

Specialists and satisfy Rule 23 does not establish that an algorithm can solve the

predominance problem in this case. Indeed, one of Ford’s experts acknowledged that

the algorithm in NYSE Specialists did not have to identify reasonably available prices

for executed trades across all market centers or take into account all of the exclusions

that must be considered here. Measuring economic loss in this case is a more complex

task, and the individual questions preclude a conclusion that common issues

predominate.

The duty of best execution requires that brokers “use reasonable efforts to

maximize the economic benefit to the client in each transaction.” Newton, 259 F.3d

at 173 (internal quotation omitted). The duty regulates a broker’s process of routing

orders for execution, but does not guarantee a specific outcome. As Ford’s expert

acknowledged, compliance with the duty of best execution does not guarantee that the

customer will get the best deal possible. Nor does a violation of the duty of best

execution necessarily cause a customer economic loss. As in Newton, “[b]ecause

economic loss cannot be presumed, ascertaining which class members have sustained

injury means individual issues predominate over common ones.” Id. at 190. The

district court therefore abused its discretion in certifying a class under Rule 23(b)(3).

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C.

There is an independent problem with the class as defined by the district court: 

it is an impermissible “fail-safe class.” The class consists of “[a]ll clients of TD

Ameritrade . . . who placed orders that did not receive best execution, in connection

with which TD Ameritrade received either liquidity rebates or payment for order

flow, and who were thereby damaged.” This definition incorporates two contested

elements of liability—failure to seek best execution and economic loss. By defining

the class to include only those customers who were harmed by TD Ameritrade’s

alleged failure to seek best execution, the district court certified a class in which

membership depends upon having a valid claim on the merits.

Such a class is impermissible because it allows putative class members to seek

a remedy but not be bound by an adverse judgment. Orduno v. Pietrzak, 932 F.3d

710, 716 (8th Cir. 2019). Fail-safe classes are also unmanageable, see Fed. R. Civ. P.

23(b)(3)(D), “because the court cannot know to whom notice should be sent.” 

Orduno, 932 F.3d at 717. If a fail-safe class is certified as a means of avoiding a

predominance problem under Rule 23(b)(3), “its independent shortcomings are an

alternative basis” to reverse class certification. Id.

* * *

For the foregoing reasons, we reverse the district court’s order certifying a class

and remand for further proceedings.

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