Frustrated investors who sued after being prevented from trading frantic stocks like
Online brokerage
While users of trading platforms claim in lawsuits that they have suffered losses from restrictions, legal experts say that brokerage firms have broad powers to block or restrict transactions – all explained as part of the agreements with clients that everyone signs to gain access to the Services .
Watch: Vlad Tenev, co-founder and CEO of Robinhood Markets, discusses why he decided to restrict the purchase of 13 titles on the platform, the criticisms he and the platform have suffered and his business strategy.
(Source: Bloomberg)
“I’m looking at Robinhood’s contract and he says in black and white that they can block or restrict negotiations at any time,” said Jeff Erez, who runs a Miami-based law firm that specializes in securities fraud litigation and represents plaintiffs in a lawsuit filed last year against Robinhood over service interruptions. “I don’t know of any law that guarantees you the right to buy a certain security at a certain brokerage.”
Maverick Merchants
The legal fight comes after a group of
In a lawsuit filed in New York, Robinhood user Brendon Nelson of Massachusetts said the company removed GameStop from its trading platform amid an “unprecedented stock increase”, depriving individual investors of the ability to invest and manipulate the market. The decision was a violation of the client’s contract and violated the rules of the financial sector, according to the complaint.
In a lawsuit in Chicago, Robinhood user Richard Joseph Gatz of Naperville, Illinois said the suspension of trade in BlackBerry, Nokia and AMC “was to protect institutional investment to the detriment of retail customers” and is ” with other trading platforms. “The suspension of retail trade in these stocks has caused irreparable damage and will continue to do so,” said Gatz.
Robinhood CEO
“We were not driven by a market maker or any other market participant,” said Tenev in an interview with Bloomberg Television. “This was a technical and operational decision that we made.”
He said the company’s financial needs, such as clearinghouse deposits, increase when there is a lot of volatility in the market, so “to protect the company and our customers, we have temporarily disabled the purchase of these securities”.
Other customer processes have been initiated in Florida, California and New Jersey. And New York Attorney General
Robinhood has faced criticism in the past for allowing relatively unsophisticated investors to engage in risky trades that have resulted in massive losses, and some commentators have expressed concern about the losses that individual investors are likely to suffer when Reddit-driven bubbles burst.
Wide discretion
Brokers have ample discretion to limit trades to provide flexibility in handling unusual situations, such as technical failures, mechanical errors and errors, or to preserve an orderly market, said Columbia Law School professor Joshua Mitts, a specialist in corporate law.
“There is no obligation for a broker to unconditionally accept orders to buy, sell or short sell securities,” he said.
The lawsuits “are likely to be dismissed based on the language of the client’s contract,” he said.
“It is understandable that many investors are upset by the sudden restrictions on trading certain stocks,” especially if they have not read user contracts very carefully, said Tom Lin, a law professor at Temple University’s Beasley School of Law, whose specialties include regulation titles. “Whether brokers should exercise this power in the current circumstances is a legitimate debate. There is likely to be much more to this story than we know at the moment. “
Depends on the situation
Still, while user agreements “tend to be quite broad,” allowing brokers to refuse to work with anyone, they are not always an absolute protection against aggrieved customers, said Timothy Blood, a partner at Blood Hurts & O’Reardon in San Diego, who represented investors in disputes with brokers.
“It will depend on the particular situation that arises,” said Blood.
There may be responsibility if a broker allows trades for some clients, but not for others, especially if the one being denied needs access to the market to complete a long-term strategy with additional trades, said Blood.
“If a long-term plan is interrupted halfway, the clause will help Robinhood, but it will not be the last word on the matter,” he said.
Double standard?
“I think it is extraordinarily rare for brokers to stop this trading” without a determination from regulators that this was necessary, said Adam Ghana, of the national securities arbitration law firm Ghana Weinstein.
The increase in stock prices was the result of “a bunch of investors getting together to buy a security”, not a “insider collusion that raised the price,” he said. The filing of lawsuits “tells me that brokers who have stopped trading on their own will potentially be in many problems – both at the regulatory level and at the level of civil litigation,” he said.
While Robinhood’s customer’s contract clearly states that he can suspend trading at any time,
“When hedge funds are going to lose with a suspension of trading, they face no lockdown like this, no suspension, no downtime at the retail level,” said Mitts. “But when retail investors find themselves trapped, they find themselves unable to exit the trade.”
(Updates with comments from Robinhood’s CEO in the 8th paragraph. An earlier version corrected a reference to Bloomberg Intelligence.)
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