The Robinhood lawsuits are missing the point

We’re midway through February and already Robinhood’s having a tough year. 

After settling regulatory complaints in 2020, the discount brokerage is now facing accusations of market manipulation. The fateful decision to block GameStop Corp., AMC Entertainment Holdings Inc. and a handful of other stocks in January was condemned by the Twittersphere as well as some prominent U.S. politicians like Rep. Alexandria Ocasio-Cortez, D-N.Y., and Sen. Ted Cruz, R-Texas. It even prompted Sen. Elizabeth Warren, D-Mass., to demand Robinhood Markets Inc. explain its decision. 

Lawsuits quickly followed, including this gem alleging an “overarching conspiracy” to prevent the market from freely operating to help Wall Street firms from “hemorrhaging losses.” The defendants include almost every broker that halted trades, including Morgan Stanley, ETrade and Charles Schwab. Legal experts have said the lawsuits face tall legal hurdles. 

While refreshing to see the likes of AOC and Cruz in agreement for a fleeting moment on Twitter, these lawsuits and ensuing investigations will ultimately miss the point. Robinhood is well within its rights to halt trades in any stock. Check the fine print.

Robinhood also isn’t the only platform available to traders. For a host of other options, just google Ally Financial, M1 Finance, EToro, Interactive Brokers, FreeTrade or WeBull.

And, while retail traders weren’t able to buy those stocks and participate in the upside, they could liquidate their positions. Sure, some may have lost the ability to turn a profit, but ultimately Robinhood’s actions were designed to help retail investors steer clear of what looked eerily similar to a pump-and-dump scheme.  

While shares of GameStop didn’t plummet while Robinhood halted trading, someone was going to be left holding the bag and those shares ultimately cratered the following Monday and Tuesday. The decision may have saved some of its most inexperienced retail investors millions.

While some contend it’s not Robinhood’s job to put up safety rails, many argued the counterpoint in recent months, after Robinhood took criticism after an inexperienced options trader took his own life after believing he lost hundreds of thousands of dollars.

The CEO of Webull offered a logical reason why trades were blocked, and it has to do with settling them. According to Anthony Denier, the restrictions were placed on the firm by his clearinghouse after increased volume made the price of settling trades skyrocket.

“We’re seeing politicians jump on the bandwagon so they can start trending on Twitter,” Denier said. “It has nothing to do with some smoke-filled cigar room with Wall Street firms getting together to the dismay of the retail traders. This has to do with the settlement mechanism of the market.”

The real question is whether or not online forums should have the power to create surges in stocks and what the ramifications will ultimately be on the markets. While the forum said it was trying to stick it to the hedge funds, it also artificially inflated the price of a stock for its own gain.

Robinhood simply has the largest target on its back. The brokerage needs to answer pointed questions about its actions, and so too should other brokerage platforms. The Securities and Exchange Commission has likely already started an investigation.

Instead of tin hats and lawsuits based on conspiracy theories, the industry should promote transparency at all levels — including those behind the surge into so-called meme stocks and what can be done to discourage such behavior in the future.

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