The most recent news story that has caught my attention has without a doubt been the Gamestop share price hike. As this story has been covered by many different outlets in various degrees of sophistication, I will not be explaining any of the finance behind it. If this is the first time you have heard of Gamestop (GME), here is an easy to understand article explaining the basic ins and outs of what happened. This article touches on the important social factors, as well as obvious economic factors behind the story. Since this is a legal rather than a financial blog, the main focus of this article will be on the financial services company Robinhood, and its temporary restriction of the public trading of securities including GME.
Robinhood is a financial services company whose main revenue source comes through the offering of commission-free trades of stocks, funds, options, gold and cryptocurrency. They also offer cash management services. On January 28th 2021, Robinhood CEO Vladimir Tenev announced that Robinhood would be restricting the trading of certain securities beginning on the 29th. With the stock price being reduced by 55% between the 27th and the 28th, it was undeniable that GME was as volatile as volatile could be. However, despite its volatility, was the restriction of the ability to close your position justifiable?
This is the crux of the matter, and something that caused considerable online stir. US House Representative Rashida Tlaib, Democratic Representative Alexandria Ocasio-Cortez (AOC), Republic Senator Ted Cruz and even Tesla boss Elon Musk all believed that Robinhood’s action of restricting the trading of certain stocks was nothing short of market manipulation. By restricting trading, as the argument goes, Robinhood completely eliminated demand, meaning that the price was either going to plateau (which owing to GME’s volatility was unlikely to happen) or drop. Either way, the move was widely condemned on social media platforms, with many levelling the claim that the brokerage was acting to minimise the losses that were being suffered by hedge funds. Notably, the furore was bipartisan, with both Ted Cruz and AOC believing that something not quite right was going on. Typically, in US politics, Democrats argue for stricter regulations, so AOCs comments are expected, whereas Republicans believe that more red tape is damaging to commerce and entrepreneurship, which is why Cruz’s comments are surprising to say the least.
Whilst there was much online frenzy about organising protests in response to the restriction, it only materialised in small gatherings outside of the Robinhood HQ which, owing to coronavirus, was likely unoccupied. However, some aggrieved traders chose to pursue something much more dangerous – a lawsuit. As of today, there are 34 lawsuits filed against Robinhood. The first class-action lawsuit was filed in the Southern District of New York and alleges that the app purposefully, wilfully and knowingly removed GME from its trading platform in the midst of an unprecedented price rise which deprived retail investors of the ability to invest in the open market, and amounted to manipulation of the open market. The official reason given for restricting trading was noted by Tenev as regulatory compliance. He explained that Robinhood’s decision came due to their “net capital obligations” and “clearinghouse (an intermediary between the buyer and the seller) deposits”. These obligations fluctuate depending on market volatility, hence, by limiting trading of a certain stock, they were reducing volatility, thereby meaning that they were better able to meet their regulatory requirements. Depending on how you look it at this situation, you will either believe that some form of cronyism with hedge funds, such as Melvin Capital, has taken place, or you will believe that Tenev’s choice was simply due to regulatory obedience. Regardless of which is true, the fallout is clear. Many retail investors are unhappy, and Robinhood will likely face a mass cash withdrawal and cancellation of customer accounts in the near future.
The likelihood of any of the lawsuits succeeding is up in the air – but it does not look promising. Robinhood’s terms and conditions include the requirement that any customer looking to sue them cannot do so, but must instead pursue arbitration, which is an alternative form of dispute resolution. Furthermore, proving anti-competitive behaviour is often difficult as the bars for liability are extremely high - especially so in the US when compared to the EU. For example, following the financial crisis, only one person went to jail in the US, compared to 46 others from across the globe. The common myth that those responsible “got away with it” is both true and false. Almost half of the 47 convicted were within Iceland, a country with a population of 356,991, whereas ground zero for the crisis, the US, only ever convicted one person - Kareem Serageldin, an executive for Credit Suisse. Without getting too political or turning towards conspiracy theories, it does seem hard to believe that the country responsible for causing the crisis only ever jailed one person, whereas a minor global player like Iceland jailed 25. Ultimately, real life examples like these, plus the requirement to enter into arbitration proceedings are why I do not hold much hope for any finding of liability for Robinhood.
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