Friday, January 29, 2021

Can Robinhood Stop Trading in A Particular Stock?


In the aftermath of the run-up in the price of Gamestop (GME) Robinhood removed GME from its trading platform. Yes, Robinhood simply removed a publicly traded security from its platform, preventing its users from buying, and presumably selling, the security.

While Robinhood claims that it has the right to do so in its customer agreement,  that may not be the case. Many commentators are claiming that Robinhood has the right to reject orders, which is certainly true - depending on the reason. And the reason for rejecting orders typically relates to the customer or the order itself.

There is there is nothing in Robinhood's customer that permits it to remove a publicly traded security from its platform, preventing customers from purchasing that security. 

Robinhood will undoubtedly attempt to rely on this sentence in the customer agreement:

I understand Robinhood may at any time, in its sole discretion and without prior notice to Me, prohibit or restrict My ability to trade securities.

It is doubtful that this provision, which is contained in a paragraph titled "Purchases" and discusses the customer's obligation to pay for stock purchases, will support a claim that it can be used by the firm to prevent ALL customers from purchasing a particular security. 

In addition, Robinhood defines the words "My" and "Me" in the agreement to refer to the owner of the account in question. It does not give Robinhood the authority to prevent all customers from trading a particular security.

Another interesting point is that Robinhood did not stop trading because of some altruistic motive, it did so to protect its own profits, according to BloombergLaw. According to Bloomberglaw, Robinhood Chief Executive Officer Vlad Tenev said that the company’s financial requirements, such as deposits to clearing houses, increase when there’s a lot of volatility in the market, so “to protect the firm and to protect our customers we temporarily disabled buying in these securities.”

So, Robinhood removed the stock from its trading platform so that it would not have to pay its clearing firm (which is affiliated with the entity that owns the trading platform) from increasing its security deposits.

Adding another twist to the story,  the day after it removed Gamestop from its platform, and after being hit with a number of lawsuits, it reinstated Gamestop.

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Mark J. Astarita is a national securities attorney who has represented investors and brokerage firms for over 30 years, in a wide array of disputes and investigations, including short squeezers and bear raids. For more information, contact him at 212-509-6544 or by email at mja@sallahlaw.com



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