Robinhood is facing nearly 50 lawsuits over GameStop frenzy
nytimes.com
nytimes.com
The biggest problem most of the lawsuits face is that there is a provision in the Terms of Service that basically says that Robinhood can prevent you from trading in any stock it wishes. Any complaint that amounts to "Robinhood violated its contract" is going to go down in flames as a result--it didn't violate its contract; the people who are complaining didn't read the contract.
That really only leaves two kinds of claims that might have legs: arguing that Robinhood violated securities laws, and arguing conspiracy on the part of hedge funds. The first part is difficult to win on because many of the complainants will simply lack the standing to do so (you have to have owned the stocks in question and bought/sold at a manipulated price to show standing, and since the complaints are generally on the theme of "we tried to buy but couldn't", they fail that) [1]. The last one might survive until discovery if properly pled, but I sincerely doubt they'll ever eventually win it.
[1] One of the cases filed for a temporary restraining order mainly on the basis of the complaint. The judge found that the briefing didn't even meet the "raises serious questions" burden of proof, although they mentioned that the TRO failed really hard at the "suffered irreparable harm" part because losing money is pretty much by definition a reparable harm.
Once the evidence is presented, a plaintiff may find that Robinhood did not act with the highest standard of care, did not do everything it could have done to prepare for and handle the situation.
We don't know because the evidence hasn't been disclosed, a major part of any lawsuit is to give plaintiffs an opportunity to assess the evidence produced by the defendant to determine if any wrongdoing took place.
An obligation to maintain the market for a stock because a portion of it's owners are your customers would be a bizarre responsibility.
Given the context of gamestop's stock, only allowing to sell stocks is the exact opposite of protecting the customer's best interests.
I mean, the high demand for gamestop's stock was motivated by the rally behind a retail-backed short squeeze, where hedge funds were reported to have massively shorted gamestop's stocks. Barring customers from buying more gamestop stocks meant they were unable to strengthen their positions and thus profit from the short squeeze,and pushing them to sell represented a pressure to kill off the short squeeze, thus acting on the exact opposite of their customer's best interests.
Then there's the reported news that one of RobinHood's new backers ends up being one of the hedge funds that stood to loose massively due to this retail-backed short squeeze.
That's a weird re-phrasing of "they caused the stock to drop by manipulating the market through blocking buys".
And then there's the backpedalling by RobinHood when they reinstated buys but at a very limited rate of what? One per customer?
Wouldn't that line of argument determine that traders would have the fiduciary duty to only allow their clients to sell on price hikes and buy on price drops?
Because otherwise that line of reasoning is highly arbitrary in the sense of what RobinHood claims is in the best interests of his customer, and thus very unlike anything regarding fiduciary responsibility.
Court action (and senate hearings)have the ability to hold the publics attention under certain circumstances. Especially if there is a reviled antagonist, for which hedge funds are a good casting
Someone that owned GME shares could argue that by restricting buying but not selling shares, Robinhood was acting to lower the value of this asset. They might argue that in this situation the only fair thing to do is to restrict buying and selling altogether.
Whether that's fair is debatable. If you held GME shares and wanted to get out, but couldn't because robinhood restricted sells for no reason (ie. they couldn't execute buys because they couldn't put up the collateral, but they can still process sells because they don't need collateral for that), that can also be construed as unfair.
Robinhood is a brokerage, they are not the entire stock market.
Robinhood has 0 ability to prevent people from selling GME in the market at large.
It kind of feels like some people don't understand that Robinhood is only a gateway into a much larger system, and is fundamentally different than an "app/game" that controls the entire system on it's own servers.
Eg. those who shorted stock because they expected covid-19 to cause a market dip, sent a giant signal to the entire world that covid was going to be a big problem.
Shorting a company itself isn't so bad. Orchestrating bad PR to boost your short option earnings is bad.
So legit question, lets flip this around. Lets pretend that I am super confident, and have strong evidence to believe, that company $ABC, currently trading at $100/share, has been committing fraud and is drastically over-valued because of it. Lets say, I don't know, it was intentionally skipping numbers during the day to give the appearance of higher volume[0]. I've determined this by investing a bunch of resources in research to determine that reported numbers don't line up with the actual number of customers, or don't line up with other available data from other sources.
So I take a short position. But I'm not allowed to say anything about it. I keep silent.
Now 3 years later, the fraud is uncovered elsewhere, I make a killing, and my only response is "Ya, I knew they were fraudulent years ago, and here is all of my proof. But I didn't say anything for 3 years."
Would you argue that I'm not complicit in that fraud for all the years I knew about it?
[0] https://www.bloomberg.com/news/features/2020-07-29/luckin-co...
There are very few true obligations to report in the US. All I'm aware of are tied to specific occupations/licenses.
I am somewhat torn on where to stand on this. On one hand I do see why we would want regulation against insider trading & pump and dumps, on the other hand I worry that regulation isn't preventing either, and society quickly would become inoculated if we legalized it.
When I read Robin Hanson's paper on insider trading and prediction markets, I became much more uncertain about whether we should regulate this area than I used to be.
https://www.researchgate.net/publication/228340813_Insider_T...
Imagine an economy of 3 people, A, B and C.
A has $5.
B borrows $5 from A.
C borrows $5 from B.
A borrows $5 form C.
The economy started with $5 and $0 debt, the economy ends with $5 and $15 debt. Despite the fact that the society's total debt is now 300% the size of its economy, it is no different than how it started. Debt isn't inherently bad. Debt is a tool that allows us to collaborate.
Some of the short sales refer to the same shares; say there's one share in the company and it's (borrowed and) sold short thrice. The company's one share has been sold three times, but there haven't been sales of more shares than there are in the company - the three (short) sellers need to get that (same) one share back to close their position in sequence.
[citation needed]; is this actually true or is this just part of the WSB sales pitch?
The deeper issue is the SEC not cracking down on the fail to delivers and naked short selling.
I think Robinhood and other brokerages are the scape goats here. Their hands where tied when the companies that processed their orders refused to process trades for those stocks.
The whole debacle has exposed a lot of corrupt, fraud and other nasties while showing the SEC is completely unwilling to do their job.
No they didn't. Naked short selling is different from short selling while the short interest is high.
Seller A borrows a share, sells it to buyer B. Buyer B then leases the share to Seller C, who then short sells it. This is not a naked short, but a plain ol' short sale.
A naked short would be where Seller A doesn't own a share, but sells one to Buyer B anyway, with a contract stipulating the time the seller must buy and deliver the share. With the exception of market makers, this is illegal but ridiculously easy to detect, since Seller A's sales exceed the number of shares purchased. There is zero evidence any of the hedge funds were short selling.
Do you mean, this is legal for market makers?
Is there any other way that the number of shares being shorted, could be greater than the number of shares in existence?
Yes. They need to be able to make naked shorts, as this is what allows traders to buy a share without having a willing seller at any given moment and vice versa.
> Is there any other way that the number of shares being shorted, could be greater than the number of shares in existence?
As I mentioned, It's perfectly cromulent to have multiple non-naked shorts on the same shares, so the short interest as a percentage of float can certainly exceed 100% without any illegal behavior. I imagine the reason for this misconception is that people think of a short as an "anti-share" that can't exceed the number of shares being traded, when it's really a more abstract investment tactic or contract.
Yes, market makers are allowed to sell short without having a locate.
It should be noted that the market makers will attempt to zero out their total exposure by the end of the trading session.
It may be in the national interest to impose "reserve requirements" on brokerages in order to prevent too much perversion of market prices.
[1] https://en.wikipedia.org/wiki/Enron_scandal#Timeline_of_down...
You can still get a short interest above 100% without selling naked calls/shorts.
The main difference between a conspiracy theory and a valid theory is that a conspiracy theory is non-falsifiable; any evidence to the contrary is dismissed as "fake news" or "the deep state is hiding the evidence".
In your example here of "they testified to Congress under penalty of perjury", the response will be "Ya, they lied, because they knew the whole system would back them. They faked all of the records that show that they didn't actually do it!".
Now this isn't to say that a conspiracy theory can't be right in the end, but that still doesn't make it a valid theory.
Likewise: if you're debating a claim with someone who is being intellectually honest, they'll receive your evidence and consider it critically on the merits. If you debate a claim with a conspiracy theorist, they will use any evidence you provide them to support the idea that the conspiracy theory is even bigger than they could have imagined - more parties are corrupt, more people are in on it, etc.
It's exhausting.
They do deserve a lot of negative attention for running a brokerage in a way that invited a lot of risk-ignorant retail traders to instantly trade into leveraged positions for which they should never have been qualified in the first place. Robinhood has the valuation it does because it brought leveraged day trading to the masses. As someone who worked at a brokerage and designed trading tools, leveraged day trading isn't for the masses.
https://news.ycombinator.com/item?id=25962906
Or the suicide from the kid who didn't understand his position wasn't actually extremely negative.
The fact that it's "normal convention" to represent positions this way is a problem with the convention, not with retail investors.
They clearly did not have the finances available to provide the service they offer. Regardless of whether that was forced on them, the outcome was RH's failures manipulating a market.
RH should be fined and sued out of existence.
I also don't see the value in short selling. Seems like a way to gamble legally in all 50 states.
Of course, it creates a perverse incentive. A short-seller who is invested in a company's failure will spew tons of FUD around the company, whether it's true or not. TSLA used to be one of the most shorted companies on the market, and many bloggers that were highly critical of Tesla were short-sellers, and the noise it created made it difficult to figure out how bad the problems were.
> Seems like a way to gamble legally in all 50 states.
You could say the exact same about long positions, which is nothing more than gambling on the success of a company, the same way a short is a gamble on the failure.
I'm glad we aren't creating SEC rules based off of peoples' feelings.
Even if it wasn't intentional, it was artificial.
Your first investments should never be in individual shares - start with an tracker ETF for a few years before branching out to active management or even individual shares.
If I say that someone stole the Declaration of Independence, then I would only need to provide evidence it was stolen, not evidence that shows some particular person stole it.
In this case, evidence of illegal shorts is what one would need to provide to back their claim, not evidence that a specific firm engaged in illegal shorts.
Okay, what's the evidence of illegal shorts?
There isn't actually any evidence the named hedge funds were engaged in naked short selling. For the most part, people seem to misinterpret short interest and failure to deliver data as an indication naked short selling occurred.
It's quite clear naked short selling is possible and thus happens sometimes. I'm very dubious it's the case in Gamestop's specific situation. My specific claim is "naked short selling is a thing that exists", which is readily provable.
Robinhood has normalized pay for flow, a service that is literally shaving cash off each order in exchange for “free trading”. Pff can only generate net revenue by making traders pay more per trade than actual best execution, which Robinhood is suppose to be legally required to deliver. The SEC in the 90s and 2000s thought the practice amounted to middle manning traders and should be illegal.
Basically: Robinhood gives stock purchases to a third party, who pays Robinhood for each transaction in “rebates”. If you have a free trading account other than fidelity, you are paying insane transaction fees that are hidden from you by the pff. It’s middle manning, and Robinhood is paid to enable it.
Not a fall guy, just not all the guys that need to fall.
Making Robinhood just less bad than the rest.
[0] https://piper2.bluematrix.com/sellside/EmailDocViewer?encryp...
https://efipm.medium.com/zero-commission-brokers-selling-ord...
Then RH can sue them. As the consumer interface, the buck either stops with them, or they pass it along.
I'd genuinely shocked to see someone say they think Robinhood didnt do anything wrong. Unless I'm misunderstanding you.
And also, they were offering customers a courtesy to use unsettled funds to buy stocks immediately, rather than waiting two business days for funds to clear. Most customers generally appreciate this feature (I certainly do!).
The only thing I'd say they did wrong (but not illegally so) was not having finer-grained controls ready to go to be able to shut down purchases of shares using unsettled funds and/or margin, while still allowing purchases by users with settled funds. This is a feature that some other brokers already have, i.e. you can buy large caps with unsettled funds but penny stocks require the use of settled funds.
Robinhood was still responsible for the clearinghouse-mandated deposit requirements, whether the purchase was from settled or unsettled funds.
My understanding is that the deposit funds, and the funds-fronted-on-margin, are two different groups of money.
IIRC the deposit requirement was raised to 100%.
Even if the customer funds were settled, and the customer wanted to buy 1 share of GME for $300, Robinhood would have to post $300 of it's own money, just in case. Now would Robinhood get that money back? Most likely, but that doesn't mean they don't have to have it to deposit in the first place.
the question becomes - who/what had the power to raise this deposit ratio, and did parties that would stand to lose a lot if GME continued to rise had influence in making this deposit requirement higher?
The DTCC wouldn't care one way or another if GME went up or down. They're goal is to make sure that different parties are able to settle their obligations with a very high degree of certainty, and ensure that investors won't lose their money with solvent brokerage firms or other intermediaries.
If you're arguing that the DTCC is beholden to the whims of a (relatively) miniscule hedge fund, you're crossing into conspiracy theory territory.
I wonder if it may be a good idea to remove computers from trading except for execution enacted by humans because of human research. Should Bloomberg terminals be legal? Should everyone effectively have the same hardware? I wonder how someone in Oklahoma can compete with a large bank. Should they be able to?
https://www.institutionalinvestor.com/article/b1qdq0y5b79rzb...
I'm also interested in discussing whether or not ETFs should exist. I wonder at some point if you just kind of eliminate price discovery and prop up zombie companies.
i assume you mean passive index investing (via the instrument called ETF).
And no, it won't eliminate price discovery unless there's some 80-90% of the transactions that is only passive. And if that's the case, an enterprising active manager would spot this discrepency, and profit from the abitrage.
So in effect, passive investing is piggy-backing off the price discovery of active managers, and this reaches a balance.
Being the retail face of a complex industry apparently results in you getting blamed for the complexity.
Some of the barriers to dealing with traditional brokerages created opportunities to learn, and to put one's self into the mindset that this is a thing that is new and complex (on your first encounter), and your general approach should be researching each new thing you're trying. Heck, just the signup and annual reporting requirements on IB will make you think long and hard about each type of transaction you might want to do.
I can get behind making a business out of it, but I wonder what the long-term effects of trying to gamify and consumerify stock trading is going to have on laws, regulations, and the overall market conditions going forward. (I know what RH would say, they're "levelling the playing field for the average Joe!" But, you know, Fidelity & co. did that a long time ago - they just didn't gamify it, they gave you access to it largely as it was.)
As the Internet grew, it raised the bar higher and higher on the "baseline" level of things one needed to reasonably know about before participating in any given conversation intelligently (bear with me). As a result, it became growingly acceptable to declare something one doesn't understand as morally "bad" for being complex, and since the experience of encountering something one didn't understand was widely shared, many folks pounced on that complexity as the problem, not their failure to grasp it.
It's infinitely easier to declare a system as "bad" than to spend time to understand why it's built the way it is. Robinhood just happens to be what many people think of as "the system", rather than the actual financial system Robinhood is built on top of.
I believe this could apply across a number of problems we're seeing online right now. Groups of people who band together (right or wrong) to rail against a system that exists for reasons they do not understand. Sometimes it's justified, sometimes it's not, but every time you get that same whiff of populist anger such as what Robinhood is experiencing right now.
What's even worse is not what Robinhood is doing, but what other brokerages are doing, which is that they trick you by sending out provisional 1099s in January or February even though the companies/funds whose stock you own aren't finalized yet, you file your taxes, and then you get an amended 1099 in March that requires you to file an amended state and federal tax return at extra hassle and extra cost.
For the 90 day span of January through March I just collect all the tax forms in a drawer, and then in April I get them all out and do taxes. You don't have all the information in before then, not if you trade stocks anyway. If you only have W2 income, then you can file earlier, as the deadline for that is much earlier.
The other part was we think Robinhood would go insolvent if their users made a run on their money, and we wanted to get out before that ever happened.
The far more damaging aspect is commercial: they're no longer the darling of r/WSB.
Are investors suing for the right to be the biggest fool in a pump and dump scheme?
The consequences of not buying GameStop is that the investor has more cash in their account which doesn't change in value. Most of those who would have bought around the peak would have lost a lot of money.
If Robinhood prevented investors from selling their shares or closing their positions then that would be grounds to sue. Investors were exposed to an extremely volatile stock with no means to exit and could have lost everything in that scenario.
It was in no way arbitrary.
- While the GameStop thing should be investigated and the lack of transparency criticized, Robinhood’s stated reason for halting the trades is plausible and corroborated by other people. I suspect their shadiness was because their internal finances are worse than they are letting on. The idea that they were acting as the foot soldiers of hedge funds (who were hardly overexposed to GME anyway) is preposterous.
- Robinhood absolutely deserves to get in legal trouble (like “send the CEO to prison”) for its horrendously predatory “appification” of retail investment[1]. I had a poor opinion of Robinhood and I was still shocked by how horrible their behavior was[2]:
> In 2019, Robinhood rolled out a new cash management feature with an early access waitlist and utilized gamification to reward customers who interacted daily with the application by improving their position on the waitlist. Customers who did not interact daily watched their position on the waitlist precipitously decline, while those who succumbed to the effects of Robinhood's gamification soared up and up the waitlist.
> In an effort to encourage trading, Robinhood provides lists of securities on its application, including lists of the most-traded securities on Robinhood's platform and the most popular securities traded by Robinhood customers. This is no different than a broker-dealer agent handing a list of securities to a customer, pretending to be surprised when the customer purchases securities from that list, and then proclaiming that he made no recommendations to that customer.
> Robinhood advertisements use young actors and illustrate Robinhood's attempt to lure young, inexperienced investors into using its platform...[f]or example, one such advertisement contains a clip of a young adult saying "I'm a broke college student and investments might help my future tremendously."
Sincerely rotten folks at that company.
[1] https://www.cnbc.com/2020/12/16/robinhood-reportedly-facing-...
[2] https://www.sec.state.ma.us/sct/current/sctrobinhood/MSD-Rob...