Robinhood users have filed a class-action lawsuit against the broker – popular with millennials as one of the first commission-free investing apps – alleging ‘market manipulation’ after it suspended users from buying shares in GameStop, AMC Entertainment and 11 other companies.
Earlier this week, members of the WallStreetBets sub-Reddit saw a months-long plan to outfox short-sellers come to fruition. The share prices of GameStop, AMC Entertainment, BlackBerry and other companies ‘rocketed to the moon’ – the Redditors’ phrase for dramatic price escalation – prompting admiration and anger in equal parts. Acting SEC chair Allison Herren Lee issued a statement on January 27 saying that the regulator is ‘actively monitoring the on-going market volatility’.
On January 28 Robinhood announced that it was placing trading restrictions on 13 stocks. Users could place orders to sell their shares, but not to buy. TD Ameritrade and Charles Schwab also imposed restrictions on its users looking to trade GameStop.
In response, one Robinhood user filed a class-action lawsuit against the broker with the Southern District of New York District Court. In the lawsuit, filed on behalf of all Robinhood users (excluding Robinhood employees), Brendon Nelson, the plaintiff, writes: ‘Robinhood’s actions were done purposefully and knowingly to manipulate the market for the benefit of people and financial institutions that were not Robinhood’s customers.’
The lawsuit alleges that Robinhood is in breach of FINRA rule 5310. According to the rule, brokers ‘must make every effort to execute a marketable customer order that it receives promptly and fully.’ By halting buying activity, Robinhood has ‘caused its customers substantial losses,’ the lawsuit alleges.
In an email to Robinhood users on the afternoon of January 28, the broker said it would reinstate limited buys on the stocks it has restricted access to.
‘As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits,’ the email stated. ‘Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today. To be clear, this decision was not made on the direction of any market-maker we route to or other market participants.’
Anarchic activists or savvy capitalists?
Democratic representatives Alexandria Ocasio-Cortez and Ro Khanna expressed concerns about Robinhood’s actions. ‘We need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit,’ Ocasio-Cortez tweeted on January 28. She said she would support a hearing on the House Committee on Financial Services, if necessary – an idea backed by Republican Senator Ted Cruz (whose support was not received warmly).
Debate continues about how to interpret the actions of the individual investors who convened on Reddit to outsmart the hedge funds that had taken out short positions – and subsequently closed those positions – in GameStop and other stocks. The debate reflects the polarized world we currently live in and focuses on who gets to realize gains from the capital markets: are these Redditors anarchic activists or savvy capitalists?
On the one hand, Redditors are seen to be operating in the markets with a level of proficiency one might expect from an experienced professional investor. Tesla CEO Elon Musk, billionaire entrepreneur Mark Cuban and former US secretary of labor Robert Reich have all been sympathetic to this view.
But for others – including Gregory Branch, managing partner of Veritas Financial and Leon Cooperman, chairman and CEO of Omega Advisors – this is a manipulation of the market. Speaking to CNBC on January 28 Cooperman said: ‘This fair share is a bullshit concept and just a way to attack wealthy people.’
While the focus during this week has understandably been on the actions of members of the WallStreetBets sub-Reddit, not everyone thinks the trend of retail investors gathering on Reddit is bad news for IR teams. Patrick Tucker, managing director and head of M&A and activism at Abernathy MacGregor, tells IR Magazine this should be a wake-up call for IR professionals that ‘retail investors can’t be ignored’.
Speaking specifically about the phenomena of investing groups on Reddit, Tucker says: ‘With this new investor class, IROs at least benefit from incredible visibility into investing decisions. This can provide clarity into trading activity that can allow for strategic engagement. It is still early days, but I suspect IROs will incorporate retail sentiment into their overall IR strategy much the same way passive funds and activism forced changes in the field the past decade.’