Many detractors of Robinhood accuse the company of acting in the best interests of institutional short sellers rather than the retail investors who depend on it. It wouldn’t be the first time the company has prioritized these big funds; in December he paid a $ 65 million fine to the Securities and Exchange Commission to settle charges it misled users about the income it made by selling its clients’ orders to third-party trading companies. Robinhood has neither admitted nor denied any wrongdoing under the deal.
“To be clear, this was a risk management decision, and was not taken on the direction of the market makers we are moving towards,” Robinhood said of the restrictions he has. imposed Thursday.
Another complaint, filed around the same time as the SEC settlement, may be more informative in regards to Robinhood’s actions on Thursday. On December 16, the State of Massachusetts launched a complaint against Robinhood, accusing him of “aggressively targeting young, inexperienced investors” and exposing them to “unnecessary risk”. It is the latest in a long line of accusations which Robinhood’s playful interface makes it easy to buy and trade stocks and minimizes the downside risk.
“They’ve received a lot of criticism that it makes trading too easy, too fun to trade,” says Jim Angel, who specializes in market structure and regulation at Georgetown University’s McDonough School of Business. “When Robinhood sees a situation that they know is going to end really badly, they worry that if they don’t do something, people come back and say, ‘Why did you let me buy this $ 300 share? “
Financial experts universally agree that GameStop will eventually crash at a price that reflects its true fundamentals, and when it does, a lot of people are going to find themselves on the wrong side of this trade and lose a lot of money.
In this rendition, Robinhood is something like a bartender cutting things off before the party turns into a riot. Restricting stock market transactions is not unique either; Angel points out that many brokers do not allow clients to trade penny stocks without special permission, for example. The difference with GameStop et al. is a scale. “There is definitely a history of this type of paternalism,” Angel says. “But there is a very good question as to how paternalistic the brokerage firm should be?”
Then again, if Robinhood had the best interests of its users in mind, it could have made this move a few days ago; GameStop’s action has long since abandoned any pretense of relating to the fundamental financial outlook of the company. “It’s a little late to do it to protect customers,” says Gabriel Rauterberg, professor at the University of Michigan law school and co-author of The New Stock Market: Law, Economics and Politics. Especially given that Robinhood may have also helped trigger a sale on Thursday morning; GameStop is down 44% from Wednesday’s close, and losses in stocks like AMC have been even more dramatic.
It seems more likely that Robinhood is trying to shield itself from the SEC’s scrutiny. It was only yesterday, after all, that the agency said it was “actively monitoring current market volatility” and the various parties involved. “Since Covid-19 led to a massive increase in retail, Robinhood has had a greater presence on regulator sites,” says Rauterberg. GameStop is the most dramatic of these incidents, but not the first; individual traders have driven Hertz to unlikely highs this summer while in bankruptcy, and WallStreetBets has already given stocks like Plug Power and Lumber Liquidators a boost. “It is now undeniable that massive retailing is leading to strange things in the market.”
This distrust of regulators appeared in Robinhood’s statement Thursday afternoon. “As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearing house deposits,” the company wrote. “Some of these requirements fluctuate with market volatility and can be significant in today’s environment.” Bloomberg reported Thursday that Robinhood had recently tapped into hundreds of millions of dollars of its lines of credit, implying that it could face its own financial risks in executing those transactions.